This chapter provides an in-depth analysis of selected manufacturing sub-sectors (i.e., automotive, electronics and semiconductor, and machinery and equipment) that are being significantly reshaped by global megatrends such as digitalisation, automation, the transition to resource-efficient production models, and geopolitical and economic disruptions. Recognising the large diversity among manufacturing SMEs, the report focuses on these sub-sectors as illustrative examples of how such transformations are unfolding in practice. This targeted approach enables more nuanced insights on opportunities and challenges and supports the identification of tailored policy lessons.
Fit-for‑Future Manufacturing SMEs
Effective Policies for Transformation
Abstract
The analysis focuses on three manufacturing sectors: automotive, electronics (semiconductor), and machinery. These were identified among 24 sub-sectors of the manufacturing industry (classified by the International Standard Industrial Classification of All Economic Activities (ISIC), Rev. 4, United Nations), based on criteria such as SME value-added contribution, employment proportion, and interconnectedness with other sectors and industries within the economy. Details regarding the industry selection and methodology are described in Box 2.1 below.
The analysis focused on manufacturing sub-sectors where SMEs are both highly active and deeply embedded in broader economic and industrial systems. The selection followed a structured, multi-step process:
Identification of SME-dominant subsectors, using value-added and employment data
From the 24 manufacturing sub-sectors defined in ISIC Rev.4, eight SME-dominant sub-sectors were identified. These include automotive, machinery, electronics, fabricated metal, food, rubber and plastics, electrical equipment, and wearing apparel. SME contributions to value added in these sub-sectors range from 49% to 68%, and employment shares are similarly high, ranging from 50% to 65%.
Assessment of sectoral linkages and economic relevance using Input-Output Tables (IOTs)
IOTs were employed to trace the flows of inputs and outputs across these SME dominant sectors. This analysis highlights how SME-dominant subsectors interact with other parts of the economy and helps to estimate SME indirect contribution to national economy and the entire manufacturing industry. This method captures the systemic value created through supply chains, where SMEs serve as upstream suppliers to larger manufacturing firms.
Selection of sectors with both strong SME involvement and significant economic impact
Further refinement based on the size and strategic importance of sectors, along with alignment to national policy priority, led to the selection of automotive, electronics (semiconductor), and machinery as the focus sectors for the study. These three sectors stand out for their strong forward and backward linkages with other industries, high levels of SME participation, particularly as suppliers and intermediate goods producers for larger firms, and their significant contribution to total manufacturing output, reflecting the broader economic weight of SMEs through their integration in production chains.
Automotive sector, a cornerstone of global manufacturing with vast networks of interconnected industries
The automotive industry necessitates economies of scale, supported by a wide-ranging network of related industries, forming a pyramid-like structure for production and assembly (Kim, K.Y., 2022[1]). An automotive manufacturer assembles numerous components, which in turn, require a variety of materials. This demand for materials is critical to the upstream industries such as steel, aluminium, rubber, glass, and plastics. The automotive sector is also closely linked with downstream industries, including maintenance services, transportation, and finance, making it a crucial driver of economic activity across its value chain. In other words, the automotive industry relies on the interplay between related industries and concentrates in regional hubs within advanced manufacturing countries.
In Europe, the automotive industry directly and indirectly employs approximately 13.8 million workers, which accounts for 6.1% of the total employment within the European Union. 2.6 million people are engaged specifically in the manufacturing of motor vehicles, constituting 8.5% of all manufacturing employment across the EU (European Commission, 2024[2]). In the United States, the automotive sector accounts for around 3.3% of national value added, with 1% stemming directly from manufacturing of motor vehicles and the remainder arising from activities of upstream suppliers and downstream distribution (Dechezleprêtre et al., 2023[3]). This sector supports 9.6 million jobs, encompassing direct, indirect, and induced employment, equating to 4.9% of the total U.S. workforce (Alliance for Automotive Innovation, 2024[4]). In Japan, the automotive industry represents approximately 2.9% of GDP and accounts for 13.9% of the manufacturing GDP (International Trade Administration, 2024[5]).
The complexity of the automotive industry’s value chain is most evident in internal combustion engine vehicles, which consist of over 30 000 components. This complexity has resulted in the development of an advanced network of suppliers and manufacturers, which has subsequently evolved into a multi-tiered supply chain centred around carmakers. This structure not only underscores the logistical prowess of these manufacturers but also highlights their strategic management of an intricate web of supplier relationships as a pivotal organisational asset.
The core value chain starts with research and development, moving through procurement, assembly, marketing, sales, and culminating in after-sales service (as illustrated below in Figure 2.2A, left). Integral to this value chain are the material and component suppliers, which also have their own suppliers. The evolution of the automotive sector has ushered in a refined structure wherein Tier 1 suppliers – the linchpins of this ecosystem – aggregate detailed components from a broad network of Tier 2 and Tier 3 suppliers, many of which are SMEs. These SMEs contribute specialised parts and materials that are essential for Tier 1 suppliers’ creation of modular assemblies for carmakers. This process not only underscores the importance of Tier 1 suppliers but also requires a close and collaborative relationship with carmakers, especially in the realms of innovation. It is commonplace for these Tier 1 entities to be closely knit with carmakers, either as subsidiaries or through strategic partnerships and equity swaps, further solidifying this intricate network. A notable exception within this framework is the production of engines by vehicle manufacturers themselves. Given the engine’s critical role as the heart of the internal combustion vehicle, coupled with the high degree of technical sophistication required, carmakers opt for in-house production. This strategy ensures the safeguarding of proprietary knowledge and technological competencies, essential for maintaining competitive advantage. The engine represents a significant asset in terms of intellectual capital, characterised by tacit knowledge that extends beyond formal intellectual property, thus serving as a formidable barrier against potential new entrants into the market. This sophisticated orchestration of the automotive supply chain not only exemplifies the sector’s logistical and strategic expertise but also reflects the dynamic interplay of collaboration and competitive differentiation that underpins the industry’s ongoing evolution (Kim et al., 2022[6]).
SME important role in the automotive industry’s value chains
SMEs are well-integrated and play a significant role in the value chains of the automotive industry. Across OECD countries, micro firms and SMEs make up 98% of enterprises in sectors related to manufacturing of transport equipment, input and tech provision, and services. While large firms generate the majority of value added (67%), SMEs play an important role in different segments of the value chain, especially in the lower tiers (OECD, 2024[7]). For example, as input providers, micro firms and SMEs generate 58% of the value added (Figure 2.1).
Note: Country sample = France, Germany, Italy, Korea, Spain, Sweden, the United Kingdom. Size groups are based on the number of employees: Micro (1-9), Small (10-49), Medium (50-249), Large (250+).
Source: Dechezleprêtre, A., et al. (2023[8]), "How the green and digital transitions are reshaping the automotive ecosystem", OECD Science, Technology and Industry Policy Papers, No. 144, OECD Publishing, Paris, https://doi.org/10.1787/f1874cab-en.
SMEs are largely present in different branches of the automotive value chain ranging from raw material, component and module providers (upstream) to retail, services and maintenance (downstream). Recent OECD research highlights the important role SMEs play in job creation within sectors closely tied to the automotive industry. This includes manufacture of rubber and plastics products, manufacture of basic metals, manufacture of fabricated metal products, as well as the wholesale and retail trade and repair of motor vehicles and motorcycles, where micro firms and SMEs account for 67% of total employment (Dechezleprêtre et al., 2023[8]; OECD, 2024[7]).
Transformative trends and the evolution of automotive value chains
Megatrends are shaping the automotive sector
The automotive industry is changing rapidly, driven by technological advances, regulatory mandates, market demands, and macroeconomic conditions. In recent years, many governments have introduced regulations and incentives to reduce greenhouse gas emissions in the transport sector, particularly by promoting the adoption of hybrid and electric vehicles in the place of internal combustion engine cars. At the same time, reflecting the advancement of information and communication technology, vehicles are transitioning from basic transportation tools to fully integrated, connected devices. Increasingly, drivers can receive real-time traffic data and leverage support from autonomous driving technologies, which significantly improves the overall driving experience. These automotive trends can be characterised by the acronym CASE, i.e. connectivity (Connected), autonomous driving (Autonomous), flexible usage (Shared), and electric drive systems (Electric)1. These structural changes in the automotive industry have brought about transformations in the existing supply chain, which involves numerous SMEs.
For instance, the shift towards electromobility is leading to relocation of production networks2, particularly impacting regions currently relying on manufacturing of traditional internal combustion engines. For example, in Germany, the automotive cluster in the state of Baden-Württemberg faces a predicted 7% drop of employment by 2030, depending on the scenario, with traditional powertrain-dependent sites facing up to 56% of job losses (e-mobil BW, 2023[9]). Small and medium-sized suppliers, in particular component producers for internal combustion engines, are especially vulnerable to these changes.
The ongoing process of digital transformation is also reshaping automobiles and their value chains. The growing integration of software and hardware components has increased vehicle functionalities and complexity, with digital technologies now accounting for over 50% of a vehicle’s total value (Llopis-Albert, Rubio and Valero, 2021[10]). As these technological advancements reshape the industry, the autonomous driving market is also expanding, with potential revenues projected to reach USD 300-400 billion by 2035 (McKinsey, 2023[11]). This market growth provides many opportunities for companies, especially those involved in production of electronic interfaces, operating systems, and hardware components such as sensors and high-tech cameras.
On top of these structural changes, the automotive industry experienced two significant disruptions due to the COVID-19 pandemic, which highlighted supply chain vulnerabilities. In early 2020, during the first wave of the outbreak in the United States, the closure of automotive facilities restricted the supply of vehicles. Subsequently, in late 2020, a persistent shortage of semiconductor chips throughout the automotive supply chain obstructed production efforts aimed at meeting the rebounding consumer demand (Coffin et al., 2022[12]). In Korea, factories halted due to a shortage of automotive wiring harness imports from China (Lee and Jin, 2020[13]). These component procurement issues subsequently led major automotive companies to actively engage in global value chain (GVC) risk management. At the same time, COVID-19 negatively impacted the growth of the car-sharing business, as users preferred owning cars due to the risk of infection.
The evolution of automotive value chains
With the advent of electric and autonomous vehicles, the automotive landscape is undergoing a radical transformation. Traditional internal combustion engine components, including the engine, transmission, and associated parts, are being gradually phased out. Instead, batteries and electric motors have emerged as the new power generation systems, complemented by an array of sensors and software dedicated to autonomous driving. This paradigm shift is succinctly illustrated in Figure 2.2, which introduces the value chains for electrification, including batteries and e-powertrains, and for autonomous driving technologies. The electrification segment encompasses the production of motors, reduction gears, and various control devices that make up the e-powertrain, along with companies supplying raw materials and components necessary for battery manufacturing. The autonomous driving segment, on the other hand, comprises sensor manufacturers, such as those producing cameras, radars, and Light Detection and Ranging (LiDAR) systems, companies designing and manufacturing AI chips, and firms developing autonomous driving software. While these new value chains currently exist outside traditional vehicle manufacturers, it is conceivable that automakers may internalise these functions to some extent, further integrating these new technologies into their core operations (Box 2.2).
Source: (Kim et al., 2022[6])
Implications for SMEs: challenges and opportunities for the transition to future vehicles
The restructuring of the value chain in the automotive industry has important implications for the components manufacturers and numerous SMEs in the supply chain. The transition from internal combustion engine to electric powertrains is causing job losses in automotive clusters, particularly affecting small and medium-sized suppliers that rely on internal combustion engine component production as their core business. This transition demands substantial investments in new technologies. As highlighted by a 2023 survey of 74 German automotive suppliers, the shift from internal combustion engine to alternative powertrain technologies requires significant financial resources within these businesses, while the share of profits from e-mobility products (10% of total profit) remain considerably smaller than the share of investments in e-mobility (28% of total investments) (see country profile Germany, Manufacturing SME readiness).
However, the extent to which this evolution impacts suppliers varies significantly depending on the product and the size of the company. According to a survey by the Korea Automobile and Mobility Association, a large number of suppliers, especially smaller ones, are not ready for the transition to future vehicles. This concerns 84% of small-sized enterprises, 58% of medium-sized enterprises and 24% of middle-market enterprises3 (Korea Automobile and Mobility Association, 2022[14]). As illustrated in Figure 2.3, the reasons for not transitioning to future vehicles are largely related with a lack of knowledge about the target sector (29%) and the need to respond to current issues (28%), followed by financial (15%) and human resource (7%) constraints. The proportion of companies indicating that they are not transitioning due to their current products not aligning with future vehicle trends is also 21%. The barriers to entering the future vehicle market were identified in the following order: securing customer demand and technological partnerships (25%), lack of funding (21%), insufficient R&D capabilities (18%), and deciding the target sector (13%), and finally legal and regulatory issues (12%).
Although the majority of SMEs within the automotive industry recognise the ongoing structural changes, this recognition often does not lead to active and effective responses. Both upstream (e.g., component manufacturers) and downstream (e.g., service providers), SMEs are particularly impacted by shifts such as digitalisation and growing software integration, requiring them to adapt to the increasing complexity of automotive systems. However, many SMEs, especially those situated lower in the value chain, struggle to enhance their existing products due to limited capacity and resources, preventing them from taking proactive, future-oriented actions.
On the other hand, ongoing regulatory developments in the area of autonomous driving, coupled with significant public and private investments, create tangible opportunities for SMEs within the automotive value chain. For instance, the growing integration of software components presents new market entry opportunities for SMEs in the ICT-sector, particularly in fields like cybersecurity, testing, and digital image processing (OECD, 2024[7]). This shift toward digital technologies is underscored by the fact that more than 20% of automotive startups are now primarily focused on ICT services and software development (EC, 2020[15]).
At the same time, independent SMEs, including those in ICT services and software development, face strong competition from global software developers. Over recent years, large multinational ICT corporations have developed connected and autonomous vehicle systems (Financial Times, 2018[16]). This growing competition is also pushing OEMs to heavily invest in R&D with the objective to increase control over the value chain through development of in-house software systems (OECD, 2024[7]). To strategically enhance their expertise, data infrastructure, and service offerings, OEMs also increasingly collaborate with multinational ICT companies, including in areas beyond autonomous driving, such as the automation of production processes. This shift is reflected in the recent emergence of new collaborative platforms such as the Open Manufacturing Platform (BMW and Microsoft) or the Industrial cloud (Volkswagen, Amazon Web Services and Siemens) (Box 2.2). SMEs in the automotive value chain, particularly those offering ICT services, software, and connectivity-related components, are increasingly dependent on OEM and Tier 1 strategies regarding collaboration and knowledge sharing. The extent to which they choose to engage with smaller suppliers will play a critical role in shaping opportunities for these SMEs.
Open Manufacturing Platform (BMW and Microsoft, 2019)
The Open Manufacturing Platform, founded by German car manufacturer BMW and Microsoft in 2019, represents an example of co-operation between an OEM and a major tech player. The initiative aims to develop a standardised production platform using open-source software in order to share smart factory solutions boosting industrial IoT developments (Microsoft, 2019[17]). The platform aims to achieve this by facilitating seamless sharing of knowledge, data, and emerging technologies, fostering innovation across sectors – including manufacturers and supplier from outside the automotive sector.
Industrial cloud (Volkswagen, Amazon Web Services and Siemens, 2020)
To boost factory automation and accelerate the supply of smart factory solutions, Volkswagen collaborated with Amazon Web Services and Siemens, creating an industrial cloud open for companies working in mechanical engineering. This enabled all partner companies to connect to Volkswagen sites on the cloud and contribute with their own software applications to optimise production (Volkswagen, 2021[18]).
Role of government policies and regulations
Regulations
In many countries, the transition to vehicle electrification is being driven by national regulations and commitments aimed at reducing greenhouse gas emissions. Globally, the EU has the most far-reaching exhaust emissions regulations, with its Euro X standards4 serving as a benchmark for other countries including China, and Korea. China’s vehicle emission regulations have largely aligned with those of the EU, with the implementation dates lagging behind the equivalent EU standard by a period of 5-10 years. However, China has integrated elements from both European and past U.S. regulatory frameworks while also establishing its own unique requirements since the state 6 standard in 2020 (He and Yang, 2017[19]). Korea adopted the ultra-low emission vehicle standard for gasoline, based on California’s ultra-low emission vehicle standards, and the Euro X for diesel (Mecar, 2024[20]).
European climate law mandated reducing emissions by at least 55% by 2030 and proposed the fit for 55 package5, a detailed execution regulation. According to the roadmap, traditional internal combustion engine cars will be phased out. However, the ban on internal combustion engine cars exempts vehicles that run exclusively on e-fuels, synthetic fuels made by combining hydrogen and carbon dioxide captured from the atmosphere (European Council, 2023[21]).
Globally, many countries have established targets for zero-emission vehicles and plans to phase out internal combustion engine vehicles. Some countries set a target of 2035, while others have established more aspirational goals, aiming at 2050.
Subsidies and tax rebates for Electric Vehicles
In many countries, the gradual intensification of fuel economy and greenhouse gas emission standards from vehicle exhausts has increased the sales of electric vehicles (EVs). Specifically, CO2 emissions regulations in the European Union have led to a significant spike in sales of electric cars, with approximately 2.1 million electric cars sold in 2020 (IEA, 2021[22]). Globally, nearly 14 million new electric cars were sold in 2023, 95% of which were traded in China, Europe, and the U.S. In 2024, one year later, global car sales increased by 3.5 million reaching over 17 million new EVs (IEA, 2025[23]). Notably, the trend endured even amid a decline in overall car sales in Germany from 2022 to 2023, mainly caused by the phaseout of purchase subsidies (IEA, 2024[24]).
Many countries have introduced subsidies and tax rebates for buying and registering EVs to encourage take-up and spur innovations in the industry, in order to make electric vehicles more price-competitive compared to traditional internal combustion engine vehicles, as well as spur private investment in electric vehicle infrastructure, such as charging points. Such policies were introduced in Norway in the 1990s, the United States in 2008 and China in 2014, providing incentives for the growth of the electric vehicle market (IEA, 2021[22]). Some countries have since ended or planned to phase out EV subsidies considering the market share of EVs, the budget constraints and a narrowing price gap with internal combustion engine cars (IEA, 2025[25]). For example, Norway, where all-electric vehicles made up 80% of passenger vehicle sales in 2022 (Jaeger, 2023[26]), no longer has tax benefits nor purchase incentives. As of 2024, among the 27 EU member states, fifteen still provided purchase subsidies for ZEV commercial vehicles (vans, trucks, and buses), and twenty offered purchase subsidies for passenger EVs (BEV, PHEV, HEV, FCEV etc) (ACEA, 2024b[27]). China increased purchase subsidies during the COVID-19 pandemic period but has completely abolished the subsidy payments for electric vehicle purchases (Table 2.1). In the case of the U.S., there is no federal direct purchase subsidy currently in place. Tax credits up to USD 7 500 depending on household incomes were offered from January 2023 through September 2025 – these were then discontinued. California had offered rebates up to USD 7 500 in terms of the Clean Vehicle Rebate Project but stopped rebates in 2023. In Korea, the subsidy limit for medium and large electric passenger vehicles was reduced by KRW 1 million, equivalent to around USD 700 (from KRW 6 to 5 million, USD 4 200 to 3 500). A new upper limit of KRW 4 million (around USD 2 800) was established for subsidies for small and light electric passenger vehicles, and the subsidy for micro electric passenger vehicles was reduced from KRW 4 million to 3.5 million (around USD 4 200 to 2 500). Contrary to the trend of reducing or abolishing subsidies, Japan is raising the subsidy limits to expand the electric vehicle market, for example from JPY 400 000 (around USD 2 700) in 2020, to JPY 650 000 (around USD 4 300) in 2023 and JPY 850 000 (around USD 5 600) in 2024.
The effectiveness of electric vehicle subsidies and tax incentives has varied across countries, as measured by the additionality index, that is, the share of EV purchases induced by the subsidy policy (Sheldon and Dua, 2024[29]). The measured index for 2019 was lowest in Japan and highest in Korea. According to Sheldon and Dua (2024[29]), the large difference can be explained by the price sensitivity of consumers and the amount of subsidies. The cost per additional EV was highest in Japan while the cost per additional EV was lowest in Germany for the same reasons (Table 2.2).
Source: (Sheldon and Dua, 2024[29])
Support for Electric Vehicle Charging Infrastructure
A critical factor in the adoption and spread of EVs is the availability of sufficient charging stations. While home charging stations currently satisfy the majority of EV charging needs, the expansion of publicly accessible charging infrastructure is key for convenience and accessibility to be comparable to traditional fuel stations. This is particularly the case in densely populated urban areas, where the availability of home charging facilities is often limited or inconveniently located, as well as at major rest stops on highways frequented by long-distance travellers. Public fast chargers are especially relevant in these settings. Globally, the number of charging stations has increased significantly in recent years, with the growth rate of fast-charging stations being particularly rapid (Figure 2.5).
Source: (IEA, 2024[30])
As of 2023, China recorded the highest number of public charging facilities, accounting for 69% of the total number of charging points, with its share of slow chargers at 60% and fast chargers at 86% (IEA, 2024[30]). Relative to population size, this represents 1.9 charging stations per thousand inhabitants, compared to approximately 1.3 per thousand inhabitants in the EU27. This outcome is linked to China's substantial investments and complementary policies aimed at fostering the growth of its EV charger industry (Table 2.3).
In May 2024, a subsidy programme to develop the charging infrastructure was launched in the United States. The initiative, supported by the Bipartisan Infrastructure Law, included investments in EV charging through the USD 2.5 billion Charging and Fuelling Infrastructure (CFI) Discretionary Grant Program and funds from the National Electric Vehicle Infrastructure (NEVI) (Joint Office of Energy and Transportation, 2024[32]). The last funding round of the CFI programme was closed in November 2024, and, in early 2025, new spending obligations under NEVI were suspended pending revised federal guidance.
Technological progress and evolving regulations in autonomous driving
The commercial development of autonomous driving is advancing rapidly. Societal demands are fostering the growth and development of autonomous driving across a wide range of applications. In recent years, the demand for mobility services has shifted from car ownership to transportation tools. “Robotaxi” provides an example in this regard, even if immature technological readiness, lack of relevant systems, and still higher costs compared to existing solutions act as obstacles to commercialisation. However, the technological breakthrough in artificial intelligence and technological progress in the area of high-speed data transfer networks leads to continuous and fast enhancement of automated driving (Box 2.3).
The advancement of road testing also facilitates the commercialisation of autonomous driving. The Society of Automotive Engineers (SAE) in the U.S. defines six levels of vehicle automation ranging from Level 0 to Level 5 (Table 2.4), starting at Level 3, where the driver is not in control when the automated system is active but must take over when the system requests it. In California, as of 2024, 38 companies hold permits for testing autonomous vehicles with a safety driver, six for driverless testing, and three for deployment (California DMV, 2024[33]). Test vehicles travelled over 9 million miles on Californian roads from December 2022 to November 2023, with 3.3 million miles driverless. The National Highway Traffic Safety Administration (NHTSA) updated its autonomous vehicle crash reporting system for better accuracy. In China, 38 regions have issued regulations for intelligent vehicle testing, opening 5 200 km of test roads (China Academy of Information and Communication Research, 2022[34]).
Autonomous driving is approaching large-scale deployment even if the regulatory framework and protection systems remain underdeveloped, with road management regulations, accident liability, and insurance policies still lacking maturity. As a result, major automobile‑producing countries are working to establish relevant policies and refine their legal and regulatory systems. In 2021, the U.S. Department of Transportation announced the Automated Vehicles Comprehensive Plan, identifying short-term needs and directions for long-term change in the autonomous driving system (Table 2.5). The “New Automated Vehicle Framework”, announced in April 2025 emphasises both safety and the reduction of regulatory constraints. Among its measures, it proposes expanding the Automated Vehicle Exemption Program (AVEP) to include U.S. manufacturers, allowing access to faster exemption procedures for testing and operating non‑compliant imported vehicles on U.S. roads (U.S. DOT, 2025[36]).
In China, the regulatory framework for autonomous driving substantially evolved in recent years. In 2021, the proposed amendments to the Road Traffic Safety Law addressed legal aspects like traffic violations, liability, and accident compensation for autonomous vehicles. Autonomous driving road testing was also expanded, with the issuance of the Interim Regulations on the Management of Intelligent Connected Vehicle Road Testing and Demonstration Applications (Trial), allowing the transport of people and goods on specific routes. The government has also set technical guidelines and entry requirements for manufacturers, focusing on safety standards for Level 3 and Level 4 vehicles. Additionally, the central government established standards to guide and promote the high-quality development of autonomous driving.
In Germany, the Road Traffic Act (StVG) was amended in 2017 and 2021 to grant general road operation permissions for autonomous vehicles, accompanied by updates to the Compulsory Insurance for Vehicle Owners Act (PfIVG). In 2022, Germany introduced the Autonomous Vehicles Approval and Operation Ordinance (AFGBV), underscoring its position at the forefront of Level 4 autonomous driving legislation. To guide these efforts, Germany established an Autonomous Driving Ethics Commission in 2017, to ensure that societal concerns and ethical considerations are addressed alongside technological advancements.
Novel opportunities for innovative start-ups and SMEs in growing market for autonomous driving
The autonomous driving market is a newly emerging market, where fierce competition is unfolding between big tech companies entering the automotive industry and established car manufacturers to seize market dominance. Major companies employ various strategies such as acquiring startups, establishing subsidiaries, and promoting co-operative alliances to secure competitive advantage as shown in Table 2.6. Incumbent companies are acquiring startups or creating strategic partnerships and subsidiaries to fill their insufficient software capabilities compared to ICT companies. Entrant car manufacturers are internalising autonomous driving technologies based on their own hardware and software capabilities, while acquiring startups in key technological areas to further enhance their development. Big tech companies are focusing on mobility services, relying on their strong software capabilities. AI/OS/Chip makers are collaborating with carmakers to provide autonomous driving platforms.
Regardless of who the investors are, the competition among these end-user companies presents a significant opportunity for startups. Investment in autonomous driving startups rebounded in 2024, after a deep slump in 2022. In the second quarter of 2024, autonomous driving startups attracted USD 2.9 billion in funding (Figure 2.6), the largest investment within the sector, which includes innovations in both passenger and goods transportation (Manske, 2024[39]).
Source: (Manske, 2024[39]) based on PitchBook data.
Interestingly, corporate venture capital holds a significant share in investments in the autonomous sector (Table 2.7). This reflects the strategic approach of large corporations as they adapt to the structural changes in the automotive industry.
Major automobile-producing countries are implementing funding policies to support the development of autonomous vehicle technology. In the U.S., the Department of Transportation provided over USD 148 million in funding for over 83 projects in 2022 and 2023 through the strengthening mobility and revolutionising transportation grant programme (SMART Grants Program) (United States Department of Transportation, 2025[40]). The programme runs from 2022-2026 with USD 100 million appropriated annually. In the EU, the autonomous driving is related with the Destination-Safe, Resilient Transport and Smart Mobility services for passengers and goods in the cluster 5-Climate, Energy and Mobility under the Horizon Europe framework (European Commission, n.d.[41]). Especially, the Connected, Collaborative, and Autonomous Mobility Partnership (CCAM), coordinated by the European Commission in collaboration with private and public mobility sector stakeholders, serves as a key framework for co-operation within Horizon Europe. Its main aim is to create a mobility system that is more user-focused, while also addressing challenges such as accident prevention, the low-carbon transition, and traffic management. Additionally, the partnership emphasises improving understanding and acceptance of CCAM technologies across the European Union’s public and institutional sectors.
In the UK, the government provides funding up to GBP 150 million for Connected and Automated Mobility (CAM) as a subpart of the Advanced Manufacturing Plan (United Kingdom government, 2023[42]). The UK Government’s funding for CAM is matched by industry contributions, enabling the Centre for Connected and Autonomous Vehicles (CCAV) to strengthen the UK’s leadership in the development, deployment, and manufacturing of autonomous technologies and services. CCAV aims to establish an early commercial market and secure a competitive advantage in self-driving vehicle deployment. Since 2015, the organisation has facilitated approximately GBP 600 million in joint investment with industry across more than 100 projects nationwide.
In Germany, the Federal Ministry for Economic Affairs and Energy (BMWE) promotes innovation and competitiveness within the automotive industry. Since 2015, EUR 1.15 billion in project funding and EUR 629 million in grants have been provided to 80 collaborative projects with 719 sub-projects in autonomous driving under the funding programme “The DNA of sustainable mobility” (DNS der zukunftsfähigen Mobilität; formerly known as “New vehicle and system technologies”) (BMWE, 2026[43]). The programme’s primary objective is to strengthen the innovative capacity and future viability of the German automotive and vehicle industry – paying particular attention to supporting SMEs. Priorities include AI-driven development, validating autonomous functions, and creating data ecosystems and reference architectures to advance autonomous mobility solutions. Overall, the numerous funding and collaboration opportunities for advancements in the field of autonomous vehicle technology offer innovative start-ups and SMEs in the sector with valuable support. By innovating in areas like AI and cybersecurity, SMEs can gain a competitive edge, and potentially expand operations.
SME-targeted policy support for the automotive value chain
Across the OECD, in particular in countries with strong automotive industries, policy support measures are in place to boost SME competitiveness and integration into value chains. In the fields of autonomous driving, access to data ecosystems and production of future vehicles targeted policy support includes funding for collaborative R&D projects, preferential interest loans and grants for investment projects as well as targeted skills and networking programmes. Despite extensive support measures, their impact on most SMEs remains unclear, as often the primary beneficiaries are innovative SMEs with more resources, allowing them to invest even with uncertain returns. For example, a recent survey of German automotive suppliers shows relatively high R&D expenditures for e-mobility (Oliver Wyman, 2023[44]) – an area that demands significant financial and human resources, which smaller firms often cannot afford at the same scale as larger companies.
Maximising SME participation in innovation is essential for fostering competitive advantages within the automotive industry. As highlighted by recent OECD research on policies targeting the automotive value chain, automotive sectoral strategies, in particular across EU countries, mainly promote an “ecosystem approach” involving OEMs and suppliers in R&D networks (OECD, 2024[7]). This ecosystem approach is evident in the policy measures of the countries analysed in this report. Notable examples include measures under France’s 2030 five-year investment plan (Box 3.3) and Germany’s Catena-X project (Box 3.6) which support R&D with a focus on SME integration and networking activities. The Catena-X project exemplifies how funding support for collaborative R&D initiatives can foster the creation of “SME-ready” standardised data solutions, enhancing SME integration within the automotive value chain. This aspect of collaboration is crucial, as OEMs and larger companies increasingly control data infrastructures in the supply chain.
Additionally, the analysis highlights that, beyond collaboration, R&D programmes targeting SME participation in cutting-edge projects (see country profile Germany: “SME-innovative”) must ensure that support is easily accessible. For example, this can be achieved through dedicated advisory services, simplified entry requirements and timely funding approval.
As outlined in this chapter, SMEs face significant financial challenges when attempting to adopt costly new technologies necessary for future vehicle parts production. Targeted policy programmes, some with broad sectoral focus but open to SMEs and others specifically tailored for them, support innovation in the development of future vehicles. Examples include capital investment subsidies and support for consulting services under the Mikata project in Japan (Box 3.15), calls for investment projects to produce vehicles of tomorrow in France (Box 3.3) and investment grants to modernise vehicle supplier’s production facilities as part of the 2020 economic stimulus package in Germany. Financial support is crucial for enabling SMEs with limited resources to innovate, but, as illustrated by the country policy cases included in this report, it is as important to combine funding opportunities with expert guidance to effectively address the unique challenges faced by SMEs.
Finally, the transition to electric and autonomous vehicle production requires a workforce with specialised skills, such as expertise in battery technology or software development for vehicle automation. Some governments, in partnership with educational institutions and industry leaders, have established knowledge-sharing, training and networking programmes to support SMEs in upskilling their workforce, ensuring they can meet the technical demands of this evolving industry and remain competitive. Notable examples include the “Compétences et Métiers d’Avenir” in France (Box 3.3) with a focus on reskilling workers for digital and ecological roles for future vehicle production. Other examples are state policy programmes in Germany, which specifically target SMEs in the automotive value chain (see State policy programmes offer targeted support for manufacturing SME transformation). These programmes add value by disseminating knowledge through seminars, offering technical advice, and helping SMEs navigate funding opportunities. They also foster networking by connecting SMEs with regional transformation networks, thereby, complementing national policy programmes.
Electronics sector, driver of technological progress and economic growth
The electronics sector stands out for its rapid technological advancements and continuous innovation, serving as a critical driver of economic growth and technological progress in many OECD countries (OECD, 2024[45]). The sector encompasses a wide range of products that are integral to various industries and consumer markets. Among its key components, semiconductors – often referred to as the ‘brains’ of modern electronics – stand out as the foundation of a wide array of devices, from smartphones and computer to critical infrastructure systems and advanced medical technologies (Box 2.4). These chips form the building blocks of electronic circuits for devices for everyday consumer gadgets to a range of downstream industries, including information and communications technology (ICT), electrical equipment, and motor vehicles, accounting for a sizeable share of value added in final demand, making semiconductors often referred to as ‘the new oil’ (Figure 2.7).
In response to transformative changes in the industry landscape, in recent years many countries have developed and implemented new industrial policies that target this sector. Given the pivotal role of semiconductors in the electronics sector and the growing importance in government strategies, the following analysis will focus on the semiconductor industry and the far-reaching implications of its ongoing transformation.
Share of semiconductor value added as a percentage of final demand across sectors
Note: The sample is restricted to the leading purchasing economies: Brazil, Canada, China, France, Germany, Hong Kong (China), Ireland, Italy, Japan, Korea, Malaysia, Mexico, the Netherlands, the Philippines, Singapore, Switzerland, Chinese Taipei, Thailand, the United Kingdom, the United States. Primary energy includes coal, oil and gas.
Source: OECD semiconductor-augmented ICIO tables
Semiconductors are small electronic devices made up of billions of components that can process, store, detect, and transmit data or signals. There are various types of semiconductor chips, including logic, memory, discrete, analogue, optoelectronics, and sensors, each performing different functions and requiring specialised design and manufacturing processes.
Memory semiconductors are designed to store data and instructions. They come in two main types: volatile (DRAM) and non-volatile (ROM). Memory chips are critical for tasks such as storing programmes, operating systems, and files in devices ranging from smartphones to supercomputers. Major producers in this group are Samsung (Korea), SK Hynix (Korea) and Micron (US).
Logic semiconductors are responsible for processing functions in electronic devices, such as executing instructions from software to perform tasks. These include microprocessors (CPUs) and graphics processing units (GPUs), which are responsible for decision-making processes within devices, such as calculating, processing data, and controlling other components. Leading producers are NVIDIA (US), Advanced Micro Devices (AMD) (US), TSMC (Chinese Taipei).
DAO (Discrete, Analog, and Optoelectronics) are critical for various electronic functions like switching, amplifying, and rectifying electrical signals, or converting real world information like sound or light into digital data and electronic signals. There are various companies in this category including SMEs in many countries like Germany, Italy, Japan, Switzerland, and the US.
Over the past three decades, the semiconductor sector has experienced rapid growth and has had a substantial economic impact. The compound annual growth rate (CAGR) of this sector, at 10.7%, has far surpassed the global GDP growth rate of around 5% during this period. Performance improvements delivered by the semiconductors have fuelled enormous economic growth through the evolution of personal computers (PCs), online services, and the advent of smartphones. It is estimated that semiconductor innovation directly contributed an additional USD 3 trillion in global GDP from 1995 to 2015, with an additional USD 11 trillion in indirect economic impact (IHS Inc., 2015[47]).
The demand for semiconductors has even surged recently due to emerging industrial applications, including computing, artificial intelligence (AI), data centres, wireless communication, and other cutting-edge technologies. This increased demand has driven significant growth in the semiconductor sector, with sales reaching an all-time high of USD 574 billion in 2022 and expected to reach USD 611 billion in 2024 (Figure 2.8). The industry not only drives innovation and technological advancement but also contributes to countries’ GDP and employment. For instance, in the US, the semiconductor industry directly employs over 250 000 workers and indirectly supports millions of additional jobs. It also contributes approximately USD 7 trillion, reflecting the sector’s extensive economic impact. In countries like Korea and Chinese Taipei, the semiconductor sector is even more critical. Korea’s semiconductor industry accounts for approximately 10% of its GDP, with companies like Samsung and SK Hynix leading global markets in memory chips. Chinese Taipei’s dominance in wafer fabrication, especially through companies like TSMC, is pivotal to the global supply chain, providing over 60% of the world’s foundry production capacity (Congressional Research Service, 2023[48]).
Source: OECD calculation based on World Semiconductor Trade Statistics (WSTS).
Fragmented and long supply chains in the entangled semiconductor eco-system
A defining characteristic of the semiconductor sector is its highly fragmented and complex global supply chain, with different countries specialising in specific stages of the value chain. Firms across various regions contribute to the processes of chip design, wafer fabrication, assembly, packaging, and testing, before chips are delivered to downstream manufacturers for final devices (Asian Development Bank, 2023[49]). It is common that semiconductor chips cross international borders multiple times during production, with some estimates suggesting up to 70 cross-border movements for a single chip (Global Semiconductor Alliance, 2020[50]). This gives a specific role to regions and to firms, including SMEs, based on their competitiveness. As shown in Figure 2.9, the ecosystem comprises chip producers, companies for packaging and testing, as well as companies that manufacture the machinery and materials required for chip production. Fabless chip designers, like Nvidia, also play an increasingly important role with the advancement of AI technology. Different regions including the U.S., Europe, China, and East Asia including Korea and Chinese Taipei are key players in various stages of production.
Note: 1. Mainland China, 2. East Asia includes Korea, Japan and Chinese Taipei
The early leaders in the semiconductor industry, large U.S. firms like IBM and Intel, internalised all tasks necessary for producing chips in their in-house fabs, known as integrated device manufacturing (IDM). Today, while the U.S. continues to lead in research-intensive areas such as electronic design automation (EDA) and chip design, countries in East Asia – particularly Chinese Taipei and Korea – dominate wafer fabrication, bolstered by heavy capital investment and advanced manufacturing technologies. Japan, once a leader in chip production, has specialised in equipment and materials, while in Europe countries like Germany and the Netherlands feature specialisation in manufacturing equipment. Although European countries still produce chips in specific segments like for the automotive sector, they heavily rely on import from Asia for advanced chips manufacturing. China’s role is growing, particularly in assembly, packaging, and testing, where it leverages its vast manufacturing base, with substantial investments to expand its capabilities further along the value chain (Semiconductor Industry Association (SIA), 2021[46]).
The majority of global semiconductor manufacturing capacity is concentrated in firms headquartered in the U.S. (33% in 2019), China (26%), Korea (11%), Japan (10%) and Chinese Taipei (9%) (Semiconductor Industry Association (SIA), 2021[46]), but these shares can vary depending on the types of chips, such as Logic, Memory and DAO, reflecting regional specialisation within the industry. Over decades of specialisation, the semiconductor supply chain has become highly interdependent, as previously emphasised, with Chinese Taipei accounting for more than 60% of the global supply of certain types of chips. Recent disruptions, like the COVID-19 pandemic and geopolitical tensions, have highlighted the concentrated nature of semiconductor manufacturing and the risk associated with it. With the semiconductors becoming increasingly vital across industries, this realisation now significantly influences national strategies and government policies aimed at preserving or enhancing their competitiveness, with each country or region seeking to reconfigure the global supply chain in its favour. In fact, a number of countries, including the U.S. and across the EU, have revised their strategies by investing in domestic semiconductor production to reduce dependency and strengthen supply chain resilience.
The Role of SMEs in the Semiconductor Ecosystem
As strategies to reconfigure the semiconductor supply chain advance worldwide, SMEs within the ecosystem encounter both opportunities and challenges. While the capital-intensive nature of the semiconductor industry often limits the ability of SMEs to take on major roles, there are specialised niches where they can effectively contribute and play a critical part in the value chain.
Given the increasing complexity of technology, capital-intensive large companies play a dominant role in the sector. The fabrication process, for instance, is dominated by large companies that can afford the significant costs of building fabs and scaling production. Moreover, developments like Electronic Design Automation (EDA) and Process Design Kits (PDK) provide vital tools to chip designers but are often prohibitively expensive for smaller firms, limiting their innovation capacity and market expansion (Congressional Research Service, 2023[48]). Finally, SMEs often rely on partnerships with larger firms, which can be a key driver of growth, as illustrated in Box 2.5, but which can also create a power imbalance, further restricting their ability to innovate independently. SMEs’ small scale and limited resources often hinder their growth, forcing them to remain in specific niche markets (Jongwon Shin, 2020[51])
Despite often being under-recognised, SMEs play a crucial role in enhancing the flexibility and resilience of the semiconductor supply chain. They address gaps that larger firms may overlook, particularly in upstream segments, by supplying key components and offering specialised capabilities. Thanks to their agility, SMEs can innovate quickly and respond to niche market demands more effectively than larger players. For example, some SMEs, and startups in particular, focus on designing and developing energy-efficient chips, which are crucial with the emergence of AI, as computers need to rapidly process and store large amounts of data. Beyond innovation, SMEs also provide essential ongoing services such as maintenance, software updates, and operational support, which constitute a significant portion of their revenue in the semiconductor sector. A notable example is LAM Research, a major U.S equipment provider that, in 2021, generated over USD 2 billion in revenue from servicing maintenance.
Further, SMEs play a crucial role in upstream activities such as in semiconductor manufacturing equipment and materials. SMEs have a key role as providers of critical raw components such as silicon wafers and photomasks, as well as specialised machinery like etching machines and chemical vapor deposition (CVD) equipment. In addition, while large firms like TSMC and Samsung dominate chip production, SMEs play a significant role in the design phase before fabrication, namely as fabless companies and design houses, as well as in back-end manufacturing processes such as packaging and testing, as shown in Figure 2.10.
Source: OECD desk research and illustration.
For example, ArchiTek Corporation, a Japanese SME, developed the AiOnIc, a high-performance, low-power AI chip designed for edge devices like IoT equipment, with applications in areas such as self-driving vehicles and hazard-sensing systems. The AiOnIc delivers GPU-level parallel processing with minimal power consumption, showcasing the crucial role SMEs play in driving technological innovation. SMEs are uniquely positioned to succeed due to their simpler organisational structures, which allow management’s skills and ambitions to directly influence front-line operations (Arai, 2024[52]). Moreover, their focus on small-lot production and niche markets enables them to identify and address latent industry needs, filling gaps in market demand from a distinctive perspective. A leading company like ASML began as a small enterprise and has grown into a critical supplier of photolithography machines that are crucial for advanced semiconductor manufacturing. This equipment is essential for the precise and complex processes required in semiconductor fabrication. Similarly, GlobalWafers, a Chinese Taipei-based SME, has leveraged its specialisation in silicon wafers to become a critical supplier in the global semiconductor supply chain (Box 2.5). These examples show how SMEs, through specialisation and innovation, can build competitive edge in the industry. SMEs are also key players in niche markets in the manufacturing process, such as advanced packaging, which is becoming increasingly important as the demand for stronger and more efficient semiconductor devices grows.
GlobalWafers has grown from a small enterprise into a major player in the global semiconductor supply chain by specialising in silicon wafer production. As of 2023, GlobalWafers held approximately 18% of the global silicon wafer market, making it one of the top suppliers worldwide. The global silicon wafer market was valued at around USD 15.79 billion in 2023, with strong growth expected as demand for advanced semiconductor devices continues to rise.
Strategic Partnerships and Market Reach
Partnerships: A key driver of GlobalWafers’ growth has been its ability to form strategic alliances with major semiconductor companies, including Intel, TSMC, and Samsung, which together account for nearly 60% of global chip production.
Role in the Supply Chain: By leveraging its niche expertise, GlobalWafers supplies 200 mm and 300 mm silicon wafers to these industry leaders, ensuring their manufacturing processes run smoothly.
Market Impact and Global Position
Market Share: As of 2023, GlobalWafers held 18% of the global silicon wafer market, contributing significantly to the market’s total valuation of USD 15.79 billion annually.
Production Capacity: The company operates 17 manufacturing facilities across 10 countries, providing a global reach to support its position as a critical supplier in the semiconductor industry.
Industry Contribution: GlobalWafers’ commitment to producing high-quality wafers ensures its vital role in the semiconductor supply chain, with silicon wafers accounting for 40% of the cost of a finished semiconductor chip.
Source: OECD desk research and (Business Research Insight, 2024[53]).
The semiconductor industry is navigating a period of intense global competition, as major countries strive to secure and restructure their supply chains. This pressure is prompting a reconfiguration of long-established global networks. At the same time, emerging technologies – such as AI, big data, the metaverse, and autonomous vehicles – are creating new growth opportunities. While these trends introduce added complexity, including higher production costs and potential supply chain disruptions, they also present openings for SMEs to strengthen their market position. By targeting niche segments where they hold a competitive advantage and forming strategic partnerships with larger firms, SMEs can enhance their resilience and relevance in this evolving landscape.
Transformative changes in the semiconductor sector
Digitalisation and ever-increasing demand for semiconductors
The global semiconductor market is positioned for sustained growth, propelled by the digitalisation and the rapid advancement of transformative technologies. Notably, the recent expansion of artificial intelligence (AI) across various industries has led to an unprecedented demand for more powerful and specialised semiconductor chips, fuelling the growth of the sector. From 2012 to 2022, global semiconductor sales doubled to USD 574 billion and, by 2030, it is projected to surpass USD 1 trillion, effectively doubling its current size again (BCG and SIA, 2021[54]).
The high demand for semiconductors not only significantly boosts the profitability of the industry but also underpins advancements in crucial sectors such as drones, robotics, telecommunications, and aerospace. These industries, which often have military applications, are strategically important and are likely to receive continued support through national industrial policies. Given its critical role in enabling new technologies, the semiconductor industry holds tremendous potential for future growth supported by the governments, which impacts the direction and speed of the sector’s development. With the sector’s rapidly growing demand, SMEs have increased opportunities to find niches where they can demonstrate their competitiveness, such as in fabless operations, design houses, or packaging roles.
Drive towards resource and energy efficiency
The electronics industry accounts for 4% of global greenhouse gas (GHG) emissions. Within this industry, semiconductor manufacturing is particularly energy-intensive, and relies on complex chemical processes, which contribute to 0.3% of total global emissions (BCG, 2023[55]). Furthermore, more complex packaging and materials increase the overall environmental footprint of the industry.
As the demand for semiconductors accelerates and the fabrication of advanced chips becomes more energy intensive, the industry faces mounting pressures to implement energy-efficient processes. Currently, a single semiconductor fab can consume as much electricity as a small city. For example, TSMC’s advanced chip fabs in Chinese Taipei consumed about 7.9 billion kWh of electricity in 2020, equivalent to 4% of Chinese Taipei’s total power usage (TSMC, 2022[56]). The energy consumption in these fabs primarily comes from running the equipment necessary for the semiconductor manufacturing processes, as well as maintaining cleanroom environments that are essential for high-quality chip production. Some estimates suggest that more than 80% of the semiconductor industry’s emissions come from electricity consumption, much of which is still generated from non-renewable sources (BCG, 2023[55]).
To address these challenges, major industry players have been exploring various decarbonisation strategies. For example, TSMC has committed to use 100% renewable energy by 2050. Samsung has invested in energy-efficient technologies to reduce the energy consumption of its fabs, which has resulted in a reduction of GHG emissions per revenue unit by 56% from 2009 to 2019 (Samsung, 2024[57]). Many companies are retrofitting their existing fabs with more energy-efficient equipment, including better cooling systems and energy recovery solutions. Since one of the key sources of emissions in the sector is the use of perfluorinated compounds (PFCs) in the etching and cleaning processes, companies like IBM have been working on replacing PFCs with less harmful chemicals and implementing recycling systems to capture and reuse these gases (IBM, 2008[58]).
Against this background, SMEs in the supply chain are also faced with the need to rethink their manufacturing processes, materials sourcing, and the overall lifecycle management of semiconductor products.
Geopolitical risk, technological advancement and GVC reconfiguration
COVID and geopolitical developments
The COVID-19 pandemic created massive disruptions worldwide leading to severe chip shortages. Along with this catalyst, trade tensions, together with the recognition of the importance of manufacturing industry to the national economy, have been driving geographic reconfigurations of global value chains for the semiconductor sector. The high concentration of semiconductor production in East Asia - advanced chips under 10 nano meters are currently 100% produced in the region, 98% in Chinese Taipei, 2% in Korea - originally driven by economic efficiency, is now regarded as a major vulnerability. The historical tensions between Chinese Taipei and China, as well as between North Korea and Korea, could turn into critical threat, with major consequences for the global semiconductor supply chain. Consequently, the reconfiguration of global value chains has become a strategic priority in the industry.
The value-added cycle of the semiconductor value chain is changing
For decades, in the semiconductor sector, the distribution of value added along the product’s life cycle has followed the so-called “smile curve”, with the R&D sector capturing the highest added value. Leading countries like the U.S. have historically retained these activities domestically, protecting them through intellectual property (IP) regimes, while outsourcing manufacturing activities to other regions like East Asia (BCG and SIA, 2021[54]). However, recent shifts in technology have altered these dynamics. With advancements in AI, big data analytics, and simulations, semiconductor design has become more streamlined, reducing the development cycle. This has diminished the complexity and relative value of design activities. On the other hand, manufacturing process technology has become much more complex and intricate due to the demand for ultra-fine process technologies (like sub-10nm nodes) and advanced packaging. These technology shifts have increased the value captured by manufacturing, especially in advanced fabs, which require substantial capital investment and technical expertise. The “reverse smile curve” argument, which highlights the increasing value of the manufacturing and packaging, explains the trend in many countries to reprioritise domestic capacities in this part of the value chain (NBER, 2024[59]).
The ongoing reconfiguration of GVCs and changing roles within the semiconductor supply chain present both challenges and opportunities for SMEs. On the one hand, this restructuring allows SMEs to seek incorporation into new supply chains, which can give them access to a broad customer base and the chance to learn from the practices of larger firms in competitive markets. However, this participation also brings substantial challenges, as SMEs may struggle to establish themselves and face difficulties in adapting to rapid technological changes, higher transaction costs, and competition from larger firms in R&D and innovation (ADB, 2015[60]). As the global landscape evolves, government policies can play an important role for enabling SMEs to adapt to new market conditions and position themselves within the evolving value chain.
Policy responses to global megatrends in the semiconductor sector
Historically, semiconductors have been central to industrial policies, given their critical role in enabling technological progress and economic growth. Today, the policy focus on the industry reflects several goals: fostering economic growth, enhancing international competitiveness, bolstering resilience, and ensuring national security (NBER, 2024[59]).
For decades, the sector operated with well-established roles across the global value chain, supported by a network of diverse companies, both large and small. As geopolitical shifts and technological advancements are disrupting this balance, prompting companies to reconsider sourcing, production, and market access, some advanced countries have developed industrial policies to secure global leadership in the semiconductor sector. Such national strategies are redefining roles and influencing the global distribution of value across the industry. The impact of these evolving policies is extensive, crossing borders and affecting corporations of all sizes, both large multinational firms and SMEs.
Legislation and strategic support
Countries around the world are in a fierce race to secure their status as global semiconductor powerhouses. As digitalisation accelerates and semiconductors remain critical to this transformation, advanced economies – many of which had previously experienced a decline in manufacturing due to the rise of efficient GVCs – are now introducing major industrial policies to strengthen their manufacturing capabilities in the semiconductor sector. In 2023, approximately 2 500 industrial policy interventions were implemented globally, with a significant portion driven by the U.S., the EU and China, which accounted for almost half of all new industrial measures, targeting advanced technologies such as semiconductors and their critical components like rare minerals (IMF, 2024[61]).
Over 2010-2023, 11 jurisdictions (counting European countries as a group) had implemented at least one new policy in the semiconductor sector. The five established producers – China, Europe, Japan, Korea, and the U.S. – provided the most intensive support both in terms of the number of policies and monetary values of their spending, with most of these policies announced after 2020 (NBER, 2024[59]). This indicates that semiconductor sector policies are primarily driven by countries already leading in the field. However, the trend of implementing comprehensive national policies is a relatively recent development.
The U.S. has been especially active in promoting the semiconductor sector as a national priority, with policies aimed at reinforcing the domestic manufacturing capacity, reducing dependency on manufacturing and assembly in Asia. This was notably a main objective of the U.S. CHIPS Act, implemented in 2022. While similar approaches have been adopted globally, such as the EU CHIPS Act, or K-CHIPS Act, the U.S. CHIPS Act stood out for its scale, particularly in the funding of domestic manufacturing. While it primarily supported large-scale investments by major semiconductor manufacturers, it was also expected to benefit SMEs indirectly by increasing demand for specialised suppliers and service providers across the semiconductor value chain, as well as by creating greater opportunities to participate in innovation ecosystems and collaborative R&D activities associated with expanded investment. Evidence on the scale of these effects is still emerging, with recent review by the United States Government Accountability Office (GAO) showing that funded projects were distributed across multiple stages of the semiconductor supply chain, rather than being concentrated solely in fabrication, suggesting the potential for broader impacts across related firms and suppliers6.
In 2023, the EU CHIPS Act was introduced, with the goal to double Europe’s share of global semiconductor production from 10% to 20% by 2030. While Europe has traditionally excelled in semiconductor materials and equipment, with companies like ASML, its chip production capacity has lagged, mainly concentrated on less advanced chips. To address this gap, the EU CHIPS Act aims to foster development of advanced semiconductor fabs, particularly for sub-10nm nodes, thus positioning the EU as a global hub for next-generation semiconductors. Securing leadership in R&D is a main objective, including by leveraging the strong research base in fields like nanoelectronics and quantum computing.
Since 2025, implementation of the U.S. CHIPS Act has been subject to review and adjustment. The following comparison focuses on the main design features of the U.S. and EU semiconductor policy frameworks, noting that aspects of the U.S. approach may continue to evolve.
The U.S. CHIPS Act was introduced in 2022 to respond to major megatrends in the semiconductor sector, and to enhance national competitiveness and industry resilience. Similar initiatives have followed in other parts of the world, including the EU, whose CHIPS Act entered into force in 2023. While countries like Korea have announced national-level strategies, these are generally smaller in scale and budget. All “CHIPS Acts” share similar strategic goals, such as reducing dependence on offshore semiconductor production, enhancing supply chain resilience, and growing a skilled workforce, but they can differ in several aspects. Some of the major differences between the U.S. and EU Acts are outlined below:
New vs. Existing Funding
The amount of direct public funding provided is roughly comparable. However, while the U.S. CHIPS Act had allocated new federal funding of around USD 52 billion, most of the EU CHIPS Act’s EUR 43 billion budget has been sourced from existing EU programmes, like Horizon Europe and the Digital Europe Programme.
Subsidy Purpose
EU competition law prohibits subsidies unless they meet certain exceptions, such as aiding regional development or promoting innovation (e.g.,‘first-of-kind’ rule). This means that EU CHIPS Act subsidies must be thoroughly approved.
Tax Incentives
The U.S. CHIPS Act had provided new federal tax incentives for investment, in order to boost the financial attractiveness of building facilities, while the EU CHIPS Act does not include tax benefits.
Institutional Complexity
The U.S. CHIPS Act funding was relatively straightforward, involving a bilateral agreement between the Department of Commerce and industry recipients. In the EU, companies need to secure commitments from member state governments and then gain approval from the EC under state aid rules.
Source: OECD desk research and (CSIS, 2024[62])
Japan, Korea, and China have also introduced national level master plans and relevant legislation. Japan’s Semiconductor and Digital Strategy, launched in 2023, aims at increasing sales of semiconductor three times the current level, from JPY 5 trillion in 2020 to JPY 15 trillion in 2030. Korea, a leading memory chip producer, initiated the K-semiconductor Strategy in 2021, which evolved into the Semiconductor Mega Cluster Strategy in 2024, to consolidate its position and expand its leadership beyond memory chips to include logic chips and fabless design. Domestic giants like Samsung and SK Hynix have pledged a huge investment of KRW 510 trillion by 2030, with the government offering tax deductions of 40-50% for R&D activities. China, on the other hand, has pursued a state-led push over the past decades, largely through its Five-Year Plans and the National Integrated Circuit Industry Investment Fund (commonly known as the Big Fund). These initiatives aim to increase domestic production and reduce dependency on foreign technologies, reinforcing China’s position in the global semiconductor landscape.
Note: The table is not comprehensive but rather a list of selected policies.
Source: OECD desk research and (NBER, 2024[59])
Investment and funding programmes
In the semiconductor sector, most firms receive various forms of government financial support (OECD, 2019[63]). This includes direct budgetary support, such as direct transfers, tax reduction, and subsidised inputs, as well as financial assistance through lower interest rate or access to favourable funding sources. Traditionally, tax incentives targeting R&D were the most common type of support due to their potential for generating widespread benefits. However, in recent years, policy priorities have shifted towards direct subsidies aimed at expanding domestic production. This shift, accelerated since 2020, reflects a strategic effort to reduce dependence on offshore manufacturing and address supply chain vulnerabilities.
Establishment of large-scale funds and direct subsidies
The creation of large-scale investment funds is the cornerstone of recent government initiatives. These funds, often backed by both public and private capital, aim to support the semiconductor companies and related infrastructure. While governments typically provide the bulk of the capital, private sector involvement is encouraged to bring in expertise, innovation, and additional funding.
In the case of the U.S. CHIPS Act, the largest share of the USD 52 billion budget was allocated for the establishment of new production facilities onshore. The fund also targeted R&D, supply chain security, and workforce expansion and training. USD 39 billion was earmarked as direct subsidies for companies building fabs in the U.S. Since 2025, implementation of the Act has been subject to review and adjustment, including the reassessment of some funding agreements.
As part of the EU CHIPS Act, Europe has launched the Important Projects for Common European interest (IPCEI) framework with a budget of EUR 43 billion, redirected from existing EU-funded programmes, with the expectation that this will spur a roughly equal amount of private investment (CSIS, 2024[62]). Reportedly, some EUR 30 billion are intended to support the establishment of advanced fabs, specifically aimed at producing chips with sub-10nm nodes. The funding targets “first-of-kind” projects in the EU, involving innovative technologies. For example, in France, 12 projects have been approved in the framework of IPCEI, with EUR 7 billion allocated for the establishment of about ten factories in the electronics industry supply chain. These projects also target specific applications of microelectronics in multiple sectors, including the telecommunications and the automotive sector. The initiatives are also expected to 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[64]). A EUR 2 billion measure to support STMicroelectronics for the construction and operation of an integrated chip manufacturing plant in Italy was also approved in May 2024 (European Commission, 2024[65]).
Japan’s specified Semiconductor Fund, valued at JPY 1.7 trillion, targets investment in technologies like AI and quantum computing. The fund is further supplemented by the Green Innovation Fund and Economic Security Fund to enhance the sector’s sustainability and security. Several projects are implemented under the line “Ensuring Domestic Production Bases for Advanced Semiconductors”, which was allocated JPY 617 billion (2021) and JPY 450 billion (2022). Notably, the government pledged JPY 476 billion for TSMC’s new factory in Kumamoto and JPY 330 billion for Rapidus, a state-supported foundry startup. These investments aim to restore Japan’s position as a leader in advanced chip production.
Tax incentives and concessions
Historically, tax incentives have been a primary tool for governments to provide financial support to the semiconductor industry. Tax concessions can take the form of direct tax credits for R&D and equipment purchases, or broader tax-related incentives like property-tax abatement, special reductions in rates of corporate income tax, and investment tax credits. Tax-related support used to make up 90% of the total budgetary support provided to firms in the industry (OECD, 2019[63]), although its relative weight in the industrial policy instrumentation has reduced in recent years.
Under the K-Semiconductor Strategy, Korea offers some of the world’s most generous tax incentives for semiconductor companies, with up to 40% tax credits for R&D expenses, and 6% to 20% credits for capital investments, depending on the size of the company and the nature of the project. These incentives also extend to equipment purchases, especially benefiting fabless SMEs, as illustrated in Box 2.7, allowing smaller player to remain competitive in the global market.
Japan also offers tax incentives for investments in R&D and capital expenditures. These measures are especially focused on advanced technologies like next-generation nodes, aiming to boost the domestic production of cutting-edge chips and related technologies.
As part of the U.S. CHIPS Act, a 25% investment tax credit was introduced for qualifying investments in semiconductor manufacturing facilities and equipment. Together with direct funding and loans, this measure aimed to lower the cost of establishing, expanding, and modernising semiconductor production capacity in the U.S.
Other significant players, such as China, Chinese Taipei, and Singapore also offer competitive tax incentives to grow and sustain their global leadership in the sector. Common measures include tax exemptions. China provides a five-year tax holiday followed by a reduced tax rate after the initial period. Singapore offers corporate tax exemptions for up to 15 years for the companies undertaking high-value manufacturing or R&D activities. Chinese Taipei has offered generous tax credits that could cover as much as 35% of the companies’ capital expenses and 13% of their equipment purchases (BCG and SIA, 2021[54]). However, the incentives have been reduced after 2009-2010.
Favourable financing and loans
In addition to grants and tax incentives, many governments provide low-interest loans and other favourable financing to facilitate semiconductor investments. While tax concessions can benefit both domestic and foreign firms, support through the financial system in the form of below-market or favourable financing create a favourable environment for domestic enterprises (OECD, 2019[63]). The below-market loan and other forms of support through the financial system often use state-owned financial institutions as intermediaries and are more prevalent in economies where the state plays a strong role.
For example, Chinese State-owned enterprises (SOEs) and firms connected to government networks benefit from preferential access to credit, with favourable terms and low-cost financing provided through Chinese state banks (OECD, 2019[63]). In Korea, there is also a special financial support for the semiconductor sector, including KRW 17 trillion loan programme and the creation of a KRW 1.1 trillion fund to support the semiconductor ecosystem under its Semiconductor Mega Cluster Strategy (Ministry of Trade, Industry and Energy (MOTIE), 2024[66]).
R&D support and technology transfer
At the R&D stage, government involvement is very common, as it addresses the perceived market failure where private firms tend to underinvest in R&D without public support. The semiconductor sector is one of the most R&D-intensive fields, alongside industries like pharmaceuticals, aerospace, and software development (OECD, 2019[63]). To promote R&D, governments employ a variety of tools, including direct research grant and tax incentives, as previously discussed. Other instruments include public-private partnerships (PPPs), both within and across countries, which have played a significant role in the historical development of the semiconductor sector. This development has been supported by governments’ as well as private firms’ willingness to engage in technology transfer activities.
The EU emphasises public-private collaboration through programmes like Horizon Europe and joint undertakings, such as the EU Chips Joint Undertaking. With an expected budget of EUR 11 billion until 2030, it aims to develop cutting-edge semiconductor technologies. It will support the development of advanced technology and engineering capacity for quantum chips and establish a network of competence centres to facilitate the transfer of knowledge from the lab to the fab. At the country level, there are several examples of co-operative approaches, such as Germany’s Semiconductor-X, a sub-programme of its broader Manufacturing-X initiative. In Semiconductor-X, collaboration between industry leaders and research partners focuses on developing digital twins for the semiconductor sector based on Catena-X and Gaia-X architectures. The digital twins simulate critical supply and value chain segments, while AI-based analysis aims to help companies address industry-specific challenges, such as high throughput times, varying process yields and high product variance.
Technology transfer is often facilitated through FDI and business collaborations, which have been crucial in the development of semiconductor industries worldwide. There is virtually no country where a domestic semiconductor industry developed without substantial foreign technology transfer (NBER, 2024[59]). In the highly fragmented semiconductor supply chain, firm-to-firm relationships between buyers and sellers play a critical role in facilitating technology transfer. This exchange of knowledge has been essential for the sector’s growth, and governments have implemented policies to attract foreign companies with advanced technologies to foster this development within their borders.
Historically, public agencies have facilitated extensive international technology transfer, as seen in the example of Korea. The Electronics and Telecommunication Research Institute (ETRI) played a key role in coordinating R&D efforts between public researchers and the private sector. ETRI conducted basic research itself, while working closely with the private sector, using the tool of public procurement. It successfully encouraged foreign firms to supply the market and initiate technology development in the institute, which was then diffused into the private sector, fostering innovation. However, in most cases recent policies have not prioritised this type of approach.
Advancing the development of resource-efficient chips
The semiconductor manufacturing process is highly energy-intensive and water-demanding. As the use of semiconductors increases across a wide range of applications, the energy demand from semiconductor-enabled products also rises. Evidence shows that global energy consumption from semiconductor-enabled products has been doubling every three years since 2010 (U.S. Department of Energy, 2022[67]). To mitigate this impact, the energy efficiency of chips would also have to double just to keep pace with growing consumption.
In line with the European Green Deal, the EU has taken steps toward integrating resource efficiency into semiconductor production. Historically, the semiconductor industry has not been one of the major contributors to GHG emissions in Europe. However, with the implementation of the EU CHIPS Act, Europe’s share of global semiconductor production is expected to grow from 10% to 20% by 2030. This growth could lead to an eightfold increase in emissions from the sector, potentially surpassing those of other emission-heavy industries (Hess, 2024[68]). To address this, the EU CHIPS Act promotes energy-efficient chip design and sustainable manufacturing practices. Complementing these efforts are policies like the F-gas regulation, which targets the reduction of harmful fluorinated gases used in semiconductor manufacturing, and the proposed ban on PFAS (commonly referred to as "forever chemicals"), expected by 2026 (Hess, 2024[68]).
In 2022, the U.S. Department of Energy (DOE) introduced the Energy Efficiency Scaling for 2 Decades (EES2) initiative to address the rising energy consumption within the semiconductor industry. This programme has gathered over 60 organisations across private industry, national labs, and academia to steer research and collaboration on energy-efficient microelectronics, with the goal of increasing semiconductor energy efficiency 1 000-fold over the next 20 years, with interim goals of 10x by 2030 and 100x by 2036 (Snyder, 2023[69]).
Korea has also introduced initiatives to enhance energy efficiency and reduce the environmental footprint of its semiconductor sector. The country plans to power the fabs in its new Semiconductor Cluster entirely with renewable energy, despite challenges related with the current low rate of renewable energy usage and the need for an additional 10 GW of electricity.
In addition to specific sectoral policies, general policies applicable to the broader manufacturing industry – such as carbon trading, tax incentives for renewable energy usage, and strict emission standards – are also being implemented in many countries. The private sector has also pledged to address the industry’s intensive resource use. Companies like Intel, Samsung, and TSMC have established their own strategies, committing to operate their facilities on 100% renewable energy and to recycle water used in production.
Supply chain integration and cluster policies
Recent policy initiatives have a strong focus on domestic production. Governments are fostering clusters, geographically concentrated ecosystems where research, manufacturing, design, and assembly occur in close proximity, benefiting from shared infrastructure, talent, and supply chains. Since an efficient infrastructure is vital for regional clusters to succeed, governments are investing in transportation networks, energy supply, and logistics to ensure that manufacturing sites are seamlessly connected to needed material suppliers and global markets. The cluster, in turn, provides jobs and revives the regional economy, including SMEs, supporting their integration in the supply chains.
A compelling example includes the Chinese Taipei semiconductor industry cluster in Hsinchu Science Park, which supports approximately 150 000 jobs, attracting both local and international talent with specialised skills. The proximity of firms in the park creates strong supplier linkages and drives efficiency, enabling SMEs in the region to integrate high-tech supply chains, favouring technology adoption, skills development and new business ventures (Chen, Lin and Chu, 2013[70]; Shivakumar, Wessner and Howell, 2023[71]).
Korea is establishing a Semiconductor Mega Cluster in Yongin, near the capital aimed at securing USD 465 billion in private investment from the country’s semiconductor conglomerates, Samsung and SK Hynix. The cluster will host 16 fabs, including 2 research facilities, and will generate substantial employment. This policy also aims to address weaknesses in the Korean semiconductor industry, which currently has a supply chain self-sufficiency rate of 30%, with the majority of essential materials, equipment, and technologies sourced from outside the country. By strengthening fabless SMEs, supported by USD 18 billion in financial loans and a USD 224 million Semiconductor Ecosystem Fund, the country aims to increase self-sufficiency rate to 50% by 2030, to increasing local capacity to manufacture key semiconductor components and materials (Ministry of Trade, Industry and Energy (MOTIE), 2024[66]).
Japan has large-scale domestic investment projects in many regions in partnership with private companies. Prime example is the TSMC-Kumamoto project, whereby the Japanese government pledged around JPY 476 billion, which represents half of the total cost of the Kumamoto plant (Reuters, 2023[72]). This financial backing is part of Japan’s broader effort to bolster domestic semiconductor manufacturing and reduce its reliance on imports including government support projects for overseas supply chain diversification (re-shoring and near-shoring) from China, but also to revive regional SMEs by incorporating them into the supply chain.
One of the key pillars of Japan’s supply chain policies for critical materials, as outlined in the Economic Security Promotion Act of May 2022, includes financial support provisions. These provisions encompass subsidies from entities such as the national research and development agency NEDO, the Japan Organisation for Metals and Energy Security (JOGMEC), two-stage loans through the Japan Finance Corporation, and credit guarantees for SMEs (Kim, 2023[73]). The Japan Bank for International Co-operation (JBIC) heightened efforts to support companies along the supply chain, including overseas subsidiaries of Japanese SMEs through loans to finance the acquisition of resources, infrastructure or M&A, facilitating resources for their international growth (JBIC, 2023[74]).
Implications for SMEs of recent policy developments in the semiconductor sector
Recent national-level strategies have increasingly focused on expanding domestic production and enhancing its global competitiveness. This shift, which reflects in heightened fragmentation of the global supply chains, also creates market opportunities for local SME suppliers, as they benefit from increased demand for components. This in turn can generate the opportunity to better negotiate terms, pool resources, access new technologies and achieve economies of scale (OECD, 2024[7]). However, specific support for SMEs within the semiconductor sector remains relatively limited. Most countries prioritise overarching, national-level policies, often aimed at attracting large corporations, such as through substantial investment incentives, with the expectation that SMEs will indirectly benefit through supply chain opportunities. While the trickle-down effect is intended to create opportunities for smaller businesses, this approach often overlooks the need for direct, targeted support mechanisms to help SMEs navigate the complexities of the semiconductor industry. The lack of a SME lens in industrial strategies risks leaving smaller companies struggling to compete with dominant players in the market and missing opportunities to integrate fast-evolving supply chains.
Additionally, the resurgence of subsidies and industrial policies has raised concerns about a potential “subsidy race” across countries, as well as distortions and inefficiencies, if resources are channelled toward less efficient firms or favour larger incumbent corporations. Such outcomes risk further marginalising SMEs.
While SME-specific programmes in the semiconductor industry are rare, some countries have implemented targeted initiatives to support smaller firms. Policies with a regional collaboration element – emphasising local hubs and tailored support for SMEs – have the potential to help smaller companies secure new contracts and increase their competitiveness.
Korea offers a detailed and sector-specific approach, particularly for fabless SMEs. Under its K-Semiconductor Strategy and Semiconductor Mega Cluster plan, Korea provides subsidies, technical support, and opportunities for collaboration with larger firms such as Samsung and SK Hynix. Chinese Taipei, home to TSMC, also offers a range of programmes aimed at fostering technology development among SMEs. These programmes focus on strengthening the chip design ecosystem, offering technical assistance, and promoting partnerships between SMEs and major foundries like TSMC.
Europe has taken a more nuanced approach in supporting SMEs, with specific programmes designed to foster innovation among smaller firms. While broader national policies may still prioritise large corporations, a number of countries have introduced SME-targeted support in the form of subsidies and tax incentives (see country profiles on France and Germany), with the aim to spur their investment and competitiveness.
Korea has introduced and implemented the “Semiconductor Mega Cluster Strategy”, which involves all aspects of semiconductor development, from establishing local infrastructure powered by renewable energy to fostering private investment with a focus on integrating SMEs into the supply chain and supporting startups. The strategy also includes R&D programmes and labour training in collaboration with universities and global networks.
Currently, there are 19 production fabs and 2 research fabs in operation. By 2047, the plan envisions adding 16 new fabs (13 production fabs and 3 research fabs) through private investment of KRW 622 trillion. By 2030, the mega cluster is expected to achieve a production capacity of 7.7 million units per month.
Objective: Build the world’s largest semiconductor cluster, enhancing Korea’s industrial competitiveness and promoting local economic growth. The primary goals are to: 1) achieve a 10% market share in the semiconductor system (logic chips) market, and 2) attain 50% self-sufficiency in the supply chain.
Infrastructure: Ensure the timely provision of critical infrastructure, such as electricity and water. Plans include supplying 10 GW of electricity and 1.1 million tons of water per day, with expedited approval process to accelerate infrastructure development. Construction times are expected to be reduced by 30%.
Investment Environment: Increase tax deductions for investments up to 25% with the commitment of abolishing “killer regulations” that hinder the development of advanced industries. The initiative is backed by KRW 622 trillion (USD 470 billion), with major contributions from Samsung and SK Hynix.
Sustainability Focus: Prioritise the integration of renewable energy into the semiconductor sector with a goal to operate fabs on 100% renewable energy. The initiative includes building energy-efficient fabs to align with global sustainability trends.
SME Support: Focus on integrating SMEs into the semiconductor supply chain is key to achieve a 50% self-sufficiency rate by 2030, with an emphasis on equipment and materials. Initiatives include improving networking opportunities, expanding opportunities for prototype manufacturing, and providing financial support such as tax incentives and low-interest loans for SMEs. The goal is to nurture 10 fabless companies in the global top 50 by 2030, and foster 100 semiconductor startups by 2027 through designated funds.
Workforce Development: Various programmes to train specialists at different levels, including the establishment of specialised semiconductor graduate schools. Continue to strengthen the global co-operation with key countries like the U.S., Japan, and the EU, along with engaging in international research projects and training programmes.
Machinery sector, at the core of the ongoing digitalisation of manufacturing processes
The machinery and equipment manufacturing sector is a cornerstone of the broader manufacturing ecosystem, supplying increasingly complex products to other sectors of the economy and playing an essential role in industrial value creation. Value creation in this industry has been relatively stable in recent years in main producing countries like Germany, Japan, Korea and Italy (Figure 2.11). Nevertheless, the sector is undergoing profound transformations, characterised by an increasing product complexity, overreliance of firms on selling hardware rather than integrated solutions and external challenges such as rising material costs and price-eroding competition (McKinsey, 2021[76]).
Value added embodied in global final demand for machinery and equipment n.e.c, by country, as a share of national value added, 2010 and 2020.
Note: For example, in Germany 3.7% of the total domestic value added is part of the global final demand machinery and equipment n.e.c.
Source: OECD, Trade in Value Added Database (TiVA), oe.cd/TiVA; TiVA indicators are derived from OECD's Inter-Country Input-Output (ICIO) tables.
SMEs play a vital role in the machinery and equipment manufacturing sector representing the vast majority of companies, accounting for a sizeable amount of turnover – around 44% across the OECD, higher than the SME contribution to the overall manufacturing sector. This SME share of industry turnover raises up to 60-75% in certain economies including Portugal, Korea, Lithuania, Spain, Italy, Slovenia, Norway (Figure 2.12). In particular, medium-sized companies play a crucial role in this sector, capturing large shares of turnover across the OECD.
Note: SME shares of turnover calculated with values for selected OECD countries, including for Korea (2020), Japan and Iceland (2021). SMEs defined as firms with 1-249 employees.
Source: OECD, Structural business statistics (SBS) by size class and economic activity (ISIC Rev. 4).
However, the SME share of turnover in the sector declined in recent years. Across OECD countries, the average share fell from around 50% in 2010, to 48% in 2015, to 44% in 20227. The shift in turnover from SMEs to large companies suggests a widening gap between SMEs and large firms in terms of capabilities to adapt to ongoing economic transformations.
Transformative changes in the machinery and equipment sector
Digitalisation, automation, and connectivity
The process of digitalisation is heavily impacting the industry and SMEs operating therein. These impacts are evident in shifting products and customer demands, as well as changes in production processes (often referred to as Smart Manufacturing, Box 2.8) that increasingly integrate higher levels of automation and connectivity.
The construction machinery sub-industry provides an illustrative example of the increasing degree of automation and connectivity. Sensors and network communication are increasingly important, as they have become sufficiently cheap and small to be integrated into controller unit of future machines. Other complementary innovative products include construction robots, drones, and AI-based solutions to enable predictive maintenance of construction machines (Porsche Consulting, 2020[77]). For many SMEs, this trend implies navigating a growing complexity in products, which demands a higher level of technological expertise.
This growing complexity in products aligns with another significant trend, similarly observed in the automotive sector: the servicification of products. Firms are slowly shifting from purely offering machine components to also providing complementary services such as repair and maintenance. This shift is particularly challenging for SMEs, as it requires them to transition from their core business of delivering hardware components to becoming facilitators of an ecosystem of machinery and equipment components (MRPeasy, 2022[78]; Porsche Consulting, 2020[77]).
The structural changes emerging from the shift in types of products can also be exemplified by machinery SMEs delivering intermediate products to the automotive industry. The decline in demand for traditional powertrain components may affect their core business but also attracts new entrants to the markets including new-battery electric-vehicle OEMs, mobility operators and logistic start-ups which all rely on different types of vehicles (cars, trucks, off-road equipment). Thus, machinery SMEs may be able to leverage their core capabilities, for example in assembly and coating, to produce similar products delivered to a new customer base (McKinsey, 2021[76]).
Smart Manufacturing can be defined as the integration of advanced technologies and data-driven processes to enhance efficiency, productivity, and flexibility in manufacturing operations. In the context of Smart Manufacturing, machines are equipped with electronic sensors to generate data which serve businesses in developing knowledge and improving communication across the firm (Taylor, Baron and Schmidt, 2015[79]). To improve workflow, digitalised companies rely on modelling and simulation software. Industrial Internet of Things (IIoT) solutions enable them to gather machine performance data and remotely controlling equipment (MRPeasy, 2022[78]). IIoT platforms facilitate efficient data transmission, storage, and analysis, leveraging cost-effective cloud solutions available today (Mittal et al., 2019[80]).
The Smart Manufacturing market, whose technologies are increasingly more accessible to SMEs, is anticipated to grow annually by about 13% until 2030 (Forbes, 2023[81]). A 2022 survey by SME (formerly the Society of Manufacturing Engineers) and CESMII (Smart Manufacturing Institute) indicates that over 75% of respondents from US manufacturing companies believe smart technology will enhance their competitiveness, but only about 50% are willing to invest in smart manufacturing initiatives (SME, 2022[82]). This gap underscores that, despite the recognised advantages of smart technologies, manufacturers, especially small ones, are hesitant to allocate resources on opportunities in smart manufacturing.
New engineering methods reduce time and costs for prototyping and offer opportunities for new forms of collaboration
The changes driven by digitalisation processes of machinery manufacturers, such as the increasing demand for automated and connected equipment, also change the way products are designed. New machines and production processes can be modelled and simulated virtually. As opposed to previously longer cycles of prototyping, technologies in the area of virtual and augmented reality (VR/AR) as well as additive manufacturing (3D printing) may be used to reduce costs and shorten the product development cycle. In particular, advancements in 3D printing for the production of complex metal parts increasingly drive a shift from machining to additive manufacturing (MRPeasy, 2022[78]). This shift allows for more rapid and cost-efficient prototyping because 3D printing enables firms to produce small batches without the traditional preparatory steps (i.e. production of a mold to prepare machine parts) (E-Plus-3D, 2022[83]). As SMEs in the sector precisely tend to produce smaller batch sizes of specialised products as compared to large firms, 3D printing offers SMEs a valuable tool to rapidly innovate their products.
Additionally, the growing adoption of technologies such as IoT and AI facilitates new forms of collaboration among companies. Examples of emerging IoT-powered platforms illustrate how such initiatives enable SMEs to exchange data, identify synergies, and enhance service delivery (Box 2.9).
Italian lift sector SMEs create IoT-powered platform to foster innovation and competitiveness
Challenge
Over the past years, the Italian lift industry has been under increasing pressure to digitalise along with fierce competition. The demand for modernised production and maintenance processes is spread across numerous SMEs, requiring effective communication among various players. Further, different types, provenance and age of components complicate interoperability between different lifts – ranging from mechanical elevators to cutting-edge lifts equipped with free Wi-Fi.
Solution
In 2013, 18 SMEs founded TRE-E consortium. Some of the founding companies are competitors in the market but had previously collaborated on developing advanced control systems. Further closer co-operation was driven by the objective to boost innovation to remain competitive. The TRE-E consortium runs the IoT-powered platform Smart Lifts. It established an IoT training centre and started to gather data on different lift types with the goal to pool and standardise data formats, to be able to manage lifts more efficiently. They set the goal to connect 40 000 lifts by implementing their technology via standardised data formats, such as IoT-sensors to generate administrative and historical data for service efficiency improvements (European Digital SME Alliance, 2021[84]; OECD, 2022[85]).
German Startup Oculavis GmbH leads the way in digitalisation production processes
The German Startup Oculavis is a software developer which has developed a handful of digital solution with the goal to increase process quality in production and create smart self-services for machinery and equipment manufacturers.
These tools include a software platform and augmented reality applications, information and visual support. Their connected worker solutions replace paper-based instructions with digital, interactive ones for setup processes and training. Further, the platform enables the maintenance and inspection of tickets directly at machines, link them with step-by-step guides, reports, and logs, and provide employees with crucial machinery knowledge (KfW, 2021[86]; oculavis, n.d.[87]).
Diversification of technologies required to adopt Smart Manufacturing poses significant challenges to SMEs
Machinery manufacturers that develop innovative technologies for other businesses often spearhead digitalisation. However, many of these leading firms are large, and a significant gap in digital adoption persists between machinery SMEs and large companies, which also reflects in a widening gap in turnover and labour productivity.
As highlighted by research on Korean firms, path dependencies in the adoption of new technologies may pose an additional barrier to SMEs. The research indicates that firms are more successful in adopting or developing new technologies if they have already accumulated related technologies (Kim, Jun and Lee, 2023[88]). Thus, given the currently lower level of technology adoption in smaller firms, they may face structural barriers to diversifying their technologies in the future. However, this technological diversification is crucial to meet the shifting product, and customer demands prevalent in the machinery and equipment manufacturing sector.
To capitalise on the growing opportunities in smart manufacturing, SMEs face significant challenges, including high investment costs and organisational changes. Currently, advanced solutions are mainly adopted by large firms. A 2018 study of 68 German manufacturing SMEs (36 of which are machinery manufacturers) highlights common challenges in adopting advanced solutions encompass the high costs of IT infrastructure, IT personnel and technical training (Mittal et al., 2019[80]). Keeping up with modernising production processes requires significant investments, both in implementing advanced technologies and in developing the capabilities to effectively use the data these technologies generate. However, for many SMEs, the willingness of customers to pay does not match this increase in costs.
The increasing complexity of products and the shift towards automation and connectivity in production require higher skill levels in the machinery sector. SMEs face challenges in this regard, especially in acquiring and developing the digital skills required to adapt to the growing demand for digital solutions. The accelerated digitalisation of the sector has widened skill gaps between SMEs and large companies, as evidenced by the rapid increase in the demand for skills in automation, IoT and cybersecurity8 (OECD, 2022[89]). Additionally, machinery companies face challenges in attracting and retaining employees with the necessary AI expertise (Bain & Company, 2024[90]), which poses risks to their capacity to compete in the near future.
Resource efficiency, energy use and emissions reduction
The trend towards more low-carbon and resource-efficient production and consumption patterns is creating both opportunities and challenges for machinery and equipment manufacturers. The machinery sector plays a central role in enabling transitions across the economy, as its products are critical inputs for reducing emissions and improving resource efficiency in other industries. As a result, machinery producers are increasingly adapting their product portfolios to meet evolving demand. For instance, the expansion of renewable energy markets is increasing demand for components such as bearings, brakes, couplings and gearboxes used in wind turbines, with the global wind gearbox market projected to reach EUR 24-31 billion over the next decade. Similarly, decarbonisation efforts in hard-to-abate sectors such as cement rely on technologies that combine chemical processes with machinery components including electric drives, compressors, valves and control systems. This is contributing to the growth of specialised markets, such as that for CO2 compressors, which is projected to exceed EUR 20 billion by the end of the decade (McKinsey & VDMA, 2022[91]). While the growing markets for these types of solutions open opportunities for new revenue streams for startups and SMEs, it also comes with challenges to navigate increasingly complex technological and regulatory requirements.
At the same time, the overall machinery and equipment sector CO2 emission footprint is marked by a relatively high share of scope 3 emissions, in particular those originated from sold products. A study on a sample of 38 machinery and equipment manufacturers in Germany, Switzerland, and Austria reveals relatively low shares of scope 1 and 2 emissions (5%), while the majority of emissions relate with the purchased services, namely raw materials and intermediates (25%) and use of sold products (65%) (Strategy&, 2022[92]). For SMEs, this underscores the importance of working closely with suppliers to source lower-emission materials and components, while also designing products that are more energy-efficient, durable and easier to repair, reuse or recycle.
Reducing energy consumption also remains a key competitiveness challenge. Machinery manufacturing relies on energy-intensive processes such as forging, casting and machining, making firms particularly exposed to fluctuations in energy prices. In the European Union, the machinery sector accounted for approximately 7% of final industrial energy consumption in 2022 (Eurostat, 2024[93]). Rising energy costs have therefore placed additional pressure on many SMEs, reinforcing the need for investments in energy efficiency and process optimisation.
In this context, digital technologies can play an important enabling role. Advanced software solutions that track material flows, monitor equipment performance throughout its lifecycle and optimise maintenance schedules can help SMEs improve resource efficiency, reduce energy consumption and lower emissions. Such technologies can support emission reductions not only in firms’ own operations (Scope 1 and 2 emissions) but also across the lifecycle of the products they manufacture and sell (Scope 3 emissions).
More broadly, the shift towards circular and resource-efficient business models offers new avenues for growth and diversification. Opportunities are emerging in areas such as remanufacturing, repair services, predictive maintenance and resource-efficient machinery solutions. However, realising these opportunities often requires substantial investments in new technologies, workforce skills and organisational capabilities, which can be particularly challenging for smaller firms.
Policy responses to global megatrends in the machinery and equipment sector
Policies in the broader manufacturing landscape often have impacts on the machinery sector, since this sector is closely interconnected with other industries, such as automotive and semiconductors. For instance, government initiatives aimed at boosting semiconductor production directly impact the machinery sector, which provides essential equipment, such as photolithography and wafer handling systems and equipment, which are critical for expanding domestic chip production capacity.
Acknowledging the wide-ranging nature and impact of policies targeting the manufacturing sector at large, the following section focuses on major strategic policies and machinery-specific legislation including R&D support programmes, some of which are specifically designed to support competitiveness of SMEs in the sector.
Strategic agendas and machinery-specific legislation
As outlined in the previous section, the significant transformation of the machinery sector is largely driven by the digitalisation, automation, and the increasing servicification of products. This shift in products and production processes has created a new ecosystem of components, with greater software integration and evolving demands for maintenance and repair. To support companies adapting to this, strategic initiatives have been launched across OECD countries over recent years. These include strategies that target the manufacturing sector at large such as the U.S. National Strategic Plan for Advanced Manufacturing, I-Korea 4.0, the EU Digital Strategy, or the German platform industry 4.0. These policy initiatives, largely aimed at boosting the digitalisation of the manufacturing sector, impact SMEs across various dimensions, operational (e.g., AI and IoT integration), financial (investments in new technologies), and strategic (market access).
Additionally, machinery-specific regulations, initially developed to ensure safe interactions between humans and machines, now consider evolving technologies, changing market conditions and the increasing integration of software components into machinery manufacturing. This is exemplified by the updated EU Machinery Regulation 2023/1230, which also aims to reduce administrative and compliance costs for SMEs through preferential conditions, such as reduced fees for the updated conformity assessment9 (Box 2.10).
Policy initiatives that aim at accelerating the low-carbon transformation of the industry, such as the EU Green Deal Industrial Plan, also have an impact on the machinery manufacturing sector, including SMEs, as the market for energy-efficient equipment and technologies expands (European Parliament, n.d.[94]).
Major policy initiatives also emphasise the localisation of supply chains to enhance industrial resilience. The 2022 U.S. Inflation Reduction Act (IRA), for example, offered tax credits for domestically produced machinery components, with the aim to reduce reliance on foreign suppliers and shield supply chains from global disruptions. The machinery and equipment sector often operates through fragmented supply chains and is thus highly vulnerable to economic shocks at national or global level, like falling demand and lower prices during recessions (Allianz Trade, 2024[95]).
Overview
The EU Machinery Regulation, updated in 2023, legally binding in all EU Member States by 2027, introduces several changes compared to the previous 2006/42/EC directive, in particular to address the integration of advanced technologies and software components in the machinery sector.
The 2023 EU Machinery Regulation introduces several key features to enhance product safety and compliance with modern technologies along with the other relevant regulations such as the EU Cyber Resilience Act. It broadens the definition of safety components to include physical, digital, and software elements, addressing emerging challenges posed by new digital technologies such as AI, IoT and robotics. Additionally, it establishes cybersecurity requirements to protect machinery from threats that could compromise safety functions, urging manufacturers to reassess their safety concepts. Finally, the regulation allows manufacturers to provide digital instructions and declarations, with a requirement to supply paper formats upon customer request.
SME-specific considerations
While the regulation applies broadly, the updated conformity assessment procedures are simplified for certain machinery types, reducing administrative burdens for smaller manufacturers. The new regulation also includes provisions for reduced fees for conformity assessments specifically aimed at SMEs. Finally, the regulation encourages the use of harmonised standards for machinery products, potentially facilitating easier paths to compliance to SMEs. However, as of 2024, details on the integration of harmonised of standards and compliance for SMEs remain unclear.
Financial instruments supporting machinery and equipment SMEs
Various financial instruments are available to support businesses in the machinery and equipment sector, including SMEs, in line with national and supra-national agendas for digital and low-carbon manufacturing. Although most instruments are not exclusively designed for SMEs, they are fully accessible to them. These instruments include tax incentives, loans or grants that help SMEs modernise equipment, innovate or receive targeted financial support for resource-efficiency measures or renewable energy generation. Some key examples include:
Leveraging funding from the Recovery and Resilience Facility (RRF), various EU governments have implemented support initiatives aimed at boosting energy efficiency and renewable energy generation in industries, including SMEs in the machinery and equipment sectors. For instance, under the industry decarbonisation component of its national recovery plan, Portugal has introduced targeted calls focused on energy-saving projects and renewable energy generation, striving to reach a large number of SMEs.
In Japan a Green Innovation Fund10 as well as the GX promotion strategy provide dedicated financial support for companies’ low-carbon transition. The 2023 GX promotion act supports technological advancements, including through GX economic transition bonds, carbon taxation, and a carbon trade market. Additionally, the Ministry of Economy, Trade and Industry (METI)’s “Initiatives for Ensuring the Stable Supply of Machine Tools and Industrial Robots” aim to ensure reliable supply of essential manufacturing equipment within the country to mitigate risks of supply chain disruptions. Alongside subsidies for large machinery companies, these initiatives aim to reinforce the competitiveness of the advanced machinery and equipment sector by promoting technological innovation, with a particular focus on strengthening SMEs (see country profile Japan, Machinery).
The 2022 U.S. IRA introduced tax incentives for producing domestically sourced components for the manufacture of low-carbon energy systems, along with an increase in R&D tax credits for small businesses. The provisions have been subject to policy changes since 2025, including modifications to several tax incentives. In its first two years, these IRA provisions were associated with a rise in investment, particularly in battery manufacturing (Rhodium Group/ MIT CEEPR, 2024[98]). The expanded market for battery solutions presents opportunities for those machinery SMEs specialised in battery production equipment, including assembly lines, cell manufacturing machines, and testing equipment. Market opportunities for SMEs can also stem from increased demand for components and machines of other energy-system technologies, including solar, electrolysers, and wind power.
R&D support and technology transfer to machinery and equipment SMEs
Following the OECD Taxonomy of Economic Activities based on R&D intensity (Galindo-Rueda and Verger, 2016[99]), the machinery and equipment sector is classified as a medium- to high-R&D-intensive industry, reflecting its reliance on advanced technologies and continuous innovation. The expenditure on R&D (of both SMEs and large companies) is particularly high in certain OECD countries including the U.S., Japan and Germany, followed by Korea and Italy (Figure 2.13).
Governments typically encourage R&D through a combination of tax incentives, research grants and other support measures. Such interventions are particularly relevant for SMEs in the machinery sector, which must continuously innovate to keep pace with larger competitors while facing considerable obstacles to adopting new technologies. These include high capital investment requirements and growing demand for specialised skills to operate and integrate automated systems, robotics and AI-based solutions.
Source: Eurostat, OECD. BERD by NACE Rev. 2 activity and source of funds, https://doi.org/10.2908/RD_E_BERDFUNDR2.
Several broad-based R&D support programmes are highly relevant to the machinery sector, particularly those promoting smart manufacturing, robotics and data-driven solutions. Alongside these, a number of smaller and more targeted initiatives are specifically designed to support SMEs in the machinery and equipment sector. For example, Germany's SME-innovative: The Future of Value Creation programme (Box 3.8) supports cutting-edge R&D projects tailored to the needs of SMEs in the sector. Given the significant costs associated with adopting advanced technologies and the specialised skills required to deploy them effectively, many R&D support programmes seek to improve SMEs’ access to innovation funding while reducing administrative burdens. Common measures include simplified application procedures, more streamlined reporting requirements and faster feedback on funding decisions.
Examples of policy initiatives with relevance for SMEs in the machinery sector include the following:
In Korea the Smart Manufacturing Innovation Support Programme under the Manufacturing Innovation and DX Acceleration Strategy offers R&D support, funding, and resources to assist SMEs in adopting advanced manufacturing technologies (covering from 30-100% of project costs). This includes support for smart factories, robotics and process automation and data infrastructure for SMEs to increase their competitiveness in the area of smart manufacturing (MSS, 2023[100]).
In France the challenge “Transfert Robotique”, managed by the National Research Agency (ANR) and Bpifrance, aims to transfer practical robot solutions in key industries, supporting both SMEs and large companies through grants for R&D activities and investment in equipment and software (Bpifrance, 2024[101]).
In Germany the flagship initiative under the international Manufacturing-X initiative called Factory-X (Box 2.11) provides funding for R&D projects, led by a consortium of companies, to develop a data ecosystem for factory equipment suppliers. The project includes a dedicated component for disseminating and transferring knowledge to the industry, particularly focusing on SMEs. SMEs actively participate in the R&D projects, and their access is facilitated through the development of easily deployable plug-and-play solutions.
A critical factor in ensuring that innovation reaches a broad range of firms, including SMEs, is the effective transfer of knowledge and technologies generated through R&D activities. However, despite many projects focusing on SME-oriented solutions, SMEs often have limited involvement in the resource-intensive development process. This disconnect can result in solutions that are not fully aligned with their specific needs. To address this challenge, initiatives like Germany’s Manufacturing-X, including Factory-X, integrate SMEs into the development process and, additionally, include knowledge transfer components into the policy initiatives. A notable example is the “ScaleMX project”, which allocated EUR 4 million under Manufacturing-X, to support networking and capacity-building activities within the innovation ecosystem, helping SMEs better adopt and benefit from smart manufacturing technologies.
Budget: EUR 70 million + additional budgets for knowledge transfer projects
Operated by: Federal Ministry for Economic Affairs and Energy (BMWE), Germany
Description:
Factory-X is the lighthouse project among the seven major Manufacturing-X projects aimed at establishing a cross-industry, open data ecosystem for the manufacturing sector. The initiative, led by the large companies Siemens and SAP in collaboration with 47 partners, establishes an open and collaborative data ecosystem for factory equipment suppliers and operators. The BMWE supports the initiative through different measures including non-repayable grants for R&D projects, the creation of knowledge transfer structures, and further support for the creation of interoperable data ecosystems (BMWE, 2023[102]).
This project builds on concepts developed under the “Catena-X” project and the “Industry 4.0 platform”, with an overall focus on connectivity and communication between machines and systems on the production floor. Thematically, the project is divided into 11 use cases centred around specific business applications. The use cases are designed to extend existing supply chain-oriented solutions (horizontal) by adding vertical integration, which directly connects shop floor operations (Factory-X, 2023[103]).
Factory-X focuses on the development of solutions in R&D projects in the following areas:
cross-manufacturer data consistency for engineering, equipment information, and condition;
sustainability through carbon footprint and energy management, alongside digital solutions that support a circular economy;
digital solutions for "as-a-Service" business models (e.g., marketplace/pay-per-part, remote control/monitoring);
traceability of materials, data, and products across the entire supply chain;
updates and changes for field devices.
In addition to the technical development of Factory-X, the consortium of companies involved also plays an important role in coordinating development activities across different Manufacturing-X projects and in building an international Manufacturing-X community (BMWE, 2024[104]).
Skills initiatives and the role of local actors
The digital transformation of the machinery sector is increasing demand for a broad range of specialised skills, notably in automation, IoT, AI and cybersecurity. As discussed in the trends section of this chapter, SMEs face particular challenges in acquiring these capabilities and frequently trail larger firms in terms of digital skills and expertise. According to OECD work on the future of rural manufacturing, a digital skill gap is also visible between rural and urban areas, with only 23% of individuals in rural areas having basic or above digital skills, compared to 62% in urban areas across Europe in 2019 (OECD, 2023[105]). This highlights the regional and local dimension of the skills gap, with the many machinery and equipment SMEs located in rural areas facing added challenges in attracting the digital talent necessary to transform their operations and adapt to the increasing complexity and diversification of machinery products.
While many skills initiatives and capacity-building activities are coordinated at the national or even supra-national level (e.g., the 2020 EU Pact for Skills), most incorporate a local dimension or are implemented through local trainers and institutions, such as regional labour offices and innovation agencies. These local actors play a critical role in needs-based design and effective implementation of programmes. Beyond trainings, events and seminars, many of these initiatives also offer networking opportunities, fostering collaboration and knowledge exchange among SMEs and industry experts. Examples of initiatives to upskill and connect manufacturing SMEs, particularly relevant to machinery SMEs, are the U.S. Manufacturing Extension Partnership (MEP) (Box 2.12) and the targeted German state policy programmes for the transformation of manufacturing SMEs (Box 3.11).
The U.S. Manufacturing Extension Partnership (MEP) is a programme administered by the U.S. Department of Commerce’s National Institute of Standards and Technology (NIST). Initially authorised in 1988, its primary mission is to strengthen and empower small and medium-sized U.S. manufacturers through state-designated MEP Centers located across the U.S. and in Puerto Rico. The programme comprises nearly 1 400 trusted manufacturing advisors and experts at more than 450 MEP service locations.
MEP is a public-private partnership, designed from inception as a cost-share programme. Federal appropriations pay one-half, with the balance for each Center funded by state / local governments and/or private entities, plus client fees. Operating on a fee-for-service basis, MEP provides manufacturers with a range of services, including training and capacity building in advanced manufacturing technologies, business growth strategies and lean production practices. It also supports firms in the adoption of new technologies, such as Industry 4.0 solutions, and in strengthening their cybersecurity capabilities.
The MEP works in close collaboration with their partner Manufacturing USA, which operates at national level through 17 manufacturing innovation institutes and aims to advance future manufacturing capabilities through applied research and technology development within large scale R&D innovation projects, as well as dedicated training programmes. MEP supports the deployment and adoption of these technologies and business practices through MEP centres within states, primarily for manufacturing SMEs.
Concluding observations on SME support in the machinery sector
Over the past several years, major policy initiatives at the national, regional, and supra-national level have focused on the digitalisation of the manufacturing sector. At the heart of this transformation, the machinery and equipment industry is increasingly characterised by the integration of software components, automation, and a shift toward service-oriented business models.
While relatively few initiatives have directly targeted the machinery and equipment sector and its SMEs, relevant support has often been provided through broader R&D programmes and dedicated components within them. In parallel, industrial policy initiatives have sought to expand domestic manufacturing capabilities and strengthen strategic supply chains. Regulatory frameworks have also evolved to reflect technological change. The EU Machinery Regulation, for instance, recognises the growing integration of software and digital technologies in machinery products and seeks to establish a more proportionate and manageable compliance framework, particularly for SMEs.
Despite the availability of broad policy support for innovation and digital transformation, many SMEs in the machinery sector continue to face significant barriers to adoption. In particular, substantial gaps remain between SMEs and large firms in terms of digital capabilities, resources and access to data-driven technologies. As industrial data ecosystems become increasingly important, larger companies often play a dominant role, while many SMEs struggle to keep pace due to limited financial and technical capacities. This raises the risk that SMEs will be excluded from key digital networks and miss opportunities associated with the ongoing transformation of manufacturing.
These challenges are becoming more pronounced, as machinery products become more complex, compliance requirements evolve alongside rapid technological change. In this context, targeted R&D programmes, such as those implemented in Korea and Germany, play an important role in supporting SME competitiveness. Within these programmes, specific components are designed to transfer knowledge and facilitate SMEs’ access to the developed data-driven solutions. Additionally, some targeted programmes are specifically designed to make R&D funding more accessible to SMEs, such as through fast feedback mechanisms that help streamline the process for small enterprises.
Nevertheless, sector-specific support for SMEs in the machinery sector remains relatively limited. A key challenge is the high cost of adopting advanced technologies and automating production processes, which often requires substantial investments in equipment, organisational change and workforce skills. To address these barriers, in many OECD countries local training, advisory and upskilling initiatives have been implemented. Some programmes also foster networking and collaboration opportunities, including cross-sector partnerships on issues such as data standardisation and interoperability, helping SMEs become more integrated into data and innovation ecosystems. Expanding these initiatives and improving SMEs’ access to relevant training and funding opportunities will be critical to enhancing their long-term competitiveness and resilience in an increasingly complex machinery manufacturing environment.
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← 1. At the Paris Motor Show in 2016, Dr. Dieter Zetsche, former CEO of Daimler AG and Head of Mercedes-Benz Cars, firstly introduced the concept of CASE presenting the company's strategy for the mobility of the future (Mercedes-Benz, 2024[110]).
← 2. This shift is associated with comparative advantages of selected regions in producing specific components. Due to the dominance of Asian manufacturers in battery cell production, a significant portion of the value creation for battery-electric vehicles has shifted from Europe to Asia. For example, in comparing the production of Volkswagen’s traditional Golf VIII with the fully electric ID.3, about 20% of the European powertrain value creation has moved to Asia (e-mobil BW, 2023[9]).
← 3. In Korea, there are middle-market enterprises between medium-sized and large enterprises. Middle-market enterprises are defined by the Act on the Promotion of Growth and Competitive Enhancement of Mid-sized Enterprises.
← 4. In 2024, the European Council adopted the Euro 7 regulation for emissions of substances like N2O and CH4. An interesting aspect is that the new regulation targets not only traditional internal combustion engine vehicles but also electric vehicles in case of particulate matter from brakes and tyres. Especially, the Euro 7 introduced minimum performance requirement for battery durability. The United States Environmental Protection Agency (EPA) also announced the reinforced emission standard for both passenger cars & trucks (light-duty) and commercial trucks & buses (heavy-duty) (U.S. EPA, 2024[107]). However, EPA regulations and Euro 7 standards were relaxed from their original plans due to push-back from automobile manufacturers (Folk, 2024[108]) (Reuters, 2024[109]).
← 5. According to the fit for 55, emission targets for the period of 2020-2024 are 95g CO2/km for passenger cars and 147g CO2/km for vans, 55% CO2 emission reductions for new cars and 50% for new vans from 2030 to 2034 compared to 2021 levels, and finally 100% CO2 emission reductions for both new cars and vans from 2035.
← 6. SEMICONDUCTORS: Information on Projects Funded to Strengthen U.S. Supply Chain, GAO-26-107882. Published: 11 December, 2025.
← 7. The fall in share of turnover reflects a general trend observed in the manufacturing sector (OECD averages calculated for selected OECD countries presented in Figure 1.2.). Depending on data availability, the averages for 2010, 2015, and 2022 were calculated using data from years that deviated by 1-2 years for Japan, Korea, Luxembourg, Portugal, and Switzerland.
← 8. On average, automation and IoT skill demands are diffused up to 6 times faster than other skill demands in labour markets in selected Anglophone countries (Skills for the Digital Transition: Assessing recent trends using Big Data, (OECD, 2022[89]))
← 9. A manufacturer can place a product on the EU market only when it meets all the applicable requirements. Therefore, the conformity assessment procedure is carried out before the product can be sold.
← 10. Budget of JPY 2 000 billion, including support for R&D projects and implementation of green technologies.