Industrial Policy Under Pressure

On November 6, the Federal Ministry for Economic Affairs and the Federal Ministry of Labor published the results of several industry dialogues. In these dialogues, representatives from the automotive, mechanical engineering, electrical, steel, and chemical industries worked together with the unions to develop proposals for improving competitiveness. What is noteworthy is not so much the now-familiar call for lower location costs as the explicit emphasis on small and medium-sized industrial enterprises and the entire industrial value chain.

“Small and medium-sized industrial enterprises play a central role for Germany,” states the joint paper by IG Metall, Gesamtmetall, VDA, VDMA, and ZVEI. Accordingly, support and protection measures should not unilaterally favor individual industrial sectors and thereby disadvantage other stages of production.

This is a key point for the surface technology sector. The industry operates at a multitude of interfaces in industrial value creation. Nevertheless, the companies—often small and medium-sized enterprises—that master such processes are easily overlooked in industrial policy debates. An industrial policy that primarily supports large manufacturers of end products but does not give equal consideration to their specialized supply chain structure could therefore fail to achieve its actual goal.

When Industrial Supply Chains Break Down

Recent news from the supplier industry shows that industrial erosion is accelerating. In early November, Schaeffler announced further extensive job cuts and the closure of four German locations. Among other things, Magna plans to close its plant in Waldshut-Tiengen, where electronic components for camera and radar systems are manufactured. This by no means affects only production areas whose importance is declining in the wake of the transition to electric propulsion.

Such decisions also indirectly affect the numerous specialized manufacturing companies operating in the sphere of influence of large industrial firms. When production facilities are relocated or closed, supply chain relationships and industrial structures change.

The Central Association for Surface Technology (ZVO) confirmed as early as April in its industry report that this development has long since reached the surface treatment industry. This is where the real challenge for industrial policy lies. It is not enough to encourage large companies to invest through billion-euro programs if, at the same time, the economic conditions for specialized manufacturing steps are lost. Competitive industrial value creation arises from functioning production networks, not solely from the promotion of flagship companies.

The warnings from surface treatment associations are by no means new. Based on surveys of its members, the Association for Surface Finishing (VOA) is calling for affordable energy costs, structural reforms, and a “massive reduction in bureaucracy.” The ZVO, too, has long pointed out the burdens caused by energy prices, regulatory uncertainty, dramatically increasing bureaucracy, and increasingly difficult competitive conditions.

Political Decisions and Their Consequences

The fact that fundamental decisions regarding energy and industrial policy can still raise significant doubts about their underlying rationale even years later is demonstrated by the renewed controversy surrounding Germany’s nuclear phase-out. Meanwhile, serious doubts are once again being raised as to whether the continued operation of the last nuclear power plants during the energy crisis was actually examined with an open mind. Recent statements by former State Secretary for Economic Affairs Patrick Graichen reignited this discussion in early November. When politicians take it upon themselves to prioritize ideology over decisions dictated by objective facts, the playing field becomes increasingly challenging for companies that must invest in energy-intensive facilities over the long term—not only in Germany but throughout Europe as well.

Promoting Innovation: The Gap Between Aspiration and Reality

Another contradiction—between political proclamations and reality—also appears serious. While the new industrial policy reform proposals explicitly call for strengthening research funding, the opportunities for small and medium-sized enterprises to receive public funding for innovative developments have recently been significantly restricted.

Since July 7, 2026, the federal government has temporarily stopped accepting new funding applications under the Central Innovation Program for Small and Medium-Sized Enterprises (ZIM) due to limited budgetary resources. The only exceptions are certain international cooperation projects. A decision on resuming the regular application process will be made depending on the 2027 federal budget.

A similarly problematic trend is emerging in Industrial Collaborative Research (IGF), which is of great importance, particularly for SME sectors. According to the F.O.M. research association, projects now have virtually no chance of approval unless they achieve at least 90 percent of the maximum possible review points. But even projects that receive such outstanding evaluations sometimes have to wait nine to twelve months for approval—if they receive it at all.

The problem is therefore not primarily a lack of promising research approaches. Rather, projects fail—despite positive expert evaluations—due to limited budgets and protracted funding procedures. This hinders the development of new technologies in a highly competitive global environment.

These difficulties directly affect surface technology. For example, the German Society for Electroplating and Surface Technology (DGO) organizes collaboration between research institutions and companies on industry-specific research projects within the framework of the IGF. Smaller companies in particular rely on such collaborative projects because they are often unable to finance complex pre-competitive developments on their own.

Data from the European Commission shows that this is by no means an exclusively German problem. According to its latest report on the Horizon Europe research framework program, approximately 70 percent of project proposals that met the required evaluation threshold were not funded due to budget constraints.

China Is Not Waiting for Europe’s Funding Decisions

This situation is particularly problematic in light of the changing international competitive landscape. China has long since ceased to compete with European companies solely on the basis of low production costs; rather, it now possesses increasingly capable research infrastructures and is expanding its position in numerous future-oriented industrial sectors.

Technological competition will also continue to intensify in surface engineering, particularly in the field of future technologies such as functional coatings for batteries, electronic components, hydrogen technologies, wear-resistant components, and energy-efficient production processes

Germany and Europe possess considerable expertise in this area. However, if promising research projects either cannot get off the ground or their implementation is delayed for years, countries with more effective development structures will bring these technologies to industrial maturity more quickly.

Reform proposals must be followed by decisions

The latest proposals from industry associations highlight key areas for action; for example, they call for significantly increasing funding for collaborative industrial research, expanding tax incentives for research, and improving access to funding instruments for small and medium-sized enterprises. In addition, procedures should become faster and less bureaucratic. However, given the real discrepancy between politically declared intentions and actual reality, it is doubtful that things will fundamentally change without corresponding public pressure.

Overall, policymakers must take into account the consequences of industrial location decisions for entire supply chains. When specialized manufacturing capacities are lost, technological knowledge—which cannot be easily regained—often disappears along with them.

One thing is certain: Germany and Europe cannot secure their industrial future simply by calling for technological progress. They must also enable companies and research institutions to implement it. And they must not allow the industrial value chains in which this knowledge is applied in practice to be further eroded.