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Dossier: Potential and Risks of Digitalization

Dossier: Our analysis states the challenges of the digital transformation and sketches out approaches to a solution for businesses and the state.

Anyone who wants to feel the dynamism of the global economy should come to Tuttlingen. More than 400 companies with approximately 8,000 employees make the town with 35,000 inhabitants in southern Baden-Württemberg the "global capital of medical technology". It is here that global market leaders such as Aesculap AG, the KLS Martin Group or die Karl Storz GmbH & Co. KG have been developing and manufacturing implants, surgical instruments or OP systems for the whole world, in some cases for more than 100 years. In total, Tuttlingen provides as many as 22,000 jobs – this makes it one of the strongest economic regions in all Germany.

However, dark clouds are forming over the Upper Danube Valley. They are not being caused by declining global demand. On the contrary, there is more worldwide demand than ever for quality products from Tuttlinger. Rather concern is spreading about a trend whose impact will be felt far beyond the borders of Baden-Württemberg and which is likely to permeate and completely change the entire global economy over the next few years and decades: Digitalization.

For while products and services such as smart phones or social media have already resulted in a major change to our private lives over the last ten years, business is now only in the early stages of the digital revolution – with the corresponding challenges for companies and employees. "On the one hand, the increasing digitalization of the work processes presents great opportunities for innovative companies and qualified employees," says Dr. Guido Zimmermann, the responsible analyst at the Research-Department of Landesbank Baden-Württemberg (LBBW). "On the other hand, the digital transformation is one of the greatest challenges Germany has ever had to face - both at a state and a corporate level." According to calculations from the Institute for Employment Research in Nuremberg, by 2025 every seventh job will be lost as a result of automation (to read the whole study as PDF click here). This figure is even higher in regions dominated by manufacturing. For example, for Tuttlingen the Institute for Employment Research calculates that every third job could be substituted as a result of digital technologies.

"However, this does not mean that this will automatically result in a huge increase in unemployment," states Dr. Guido Zimmermann. After all, the resulting innovative abilities will create new jobs at the same time. "Just how high the figure will be depends to a large extent whether the state and corporations manage to create an appropriate digitalization-friendly environment over the next few years." This requires rapid and sustained programs, particularly in four areas - expanding a sustainable digital infrastructure, making more flexible the employment market, education and social policy.

Germany Lagging with Digital Infrastructure

According to the LBBW Research team, one of the fundamental requirements for companies to survive in the digital age is access to high-performance internet connections, i.e. ultra-fast broad-band networks. "Connection speed is increasingly becoming the benchmark of global competitive strength," says Dr. Guido Zimmermann. But in an international comparison Germany has quite a poor ranking. According to a study from the Bertelsmann Foundation, among all the European countries examined, the world's fourth-largest economy only has a medium ranking. For fiberglass connections, Germany is ranked as low as 28 – from 32 countries. A similar result can be seen in the Digital Economy and Society Index (DESI)published by the European Commission. It compares digital performance and digital competitiveness in the individual European countries. Currently Germany is ranked 11, behind Austria and just ahead of Malta und Lithuania. "It is here that huge state investments are needed now, so as literally not to miss the connection, especially in more rural areas," states Dr. Guido Zimmermann. "Solely for the expansion of broadband networks in Baden-Württemberg to 2025 we calculate that funds of approximately EUR 5bn will be required." For this reason, the topic of digital infrastructure should be placed right at the top of the political agenda – in Stuttgart, Berlin and other places in Germany.

Huge Changes on the Employment Market

Just how great the impact of digitalization is on the labor market, in particular on such classical manufacturing professions, is clear when looking at the automobile industry. According to LBBW analyses, for example a complete realignment of the industry to electric vehicles would result in 110,000 jobs being lost – and that in Baden-Württemberg alone. This loss would be compensated only to a minor extent by new jobs in the production of alternative drives. Instead of wanting to find a 1:1 replacement of lost jobs, companies have to rethink and access new business areas. Here buying in expertise and production capacity is becoming more and more important, as is increasing the intensity of in-house research and development activities.

"At the moment, the general concern about a massive loss of jobs is still unsubstantiated," states Dr. Guido Zimmermann. After all, industry in Germany has also shown high levels of innovation in periods of new challenges. As a result in the wake of digitalization, a large number of new areas of activities and thus jobs should be created. For example, in the area of mechanical engineering, the first phase of automation started in Baden-Württemberg some 40 years ago. Since then an efficient cooperation of research institutions and producing, export-oriented companies has developed, which now in the process of digitalization will again create new products and jobs. Growing sales markets, for example, in battery assembly and in food and packing technology, are ensuring a positive impact for jobs. Overall, the Baden-Württemberg mechanical engineering sector is currently even posting a moderate upturn in employment figures – a potential example for other industries for taking advantage of the digital transformation on the basis of integrating research and development.

Education Facing Long-term Challenges

A crucial element for creating the relevant jobs is an education policy which allows people to cope with and master the professional challenges of the future. This means that the key concerns for education in the digital era have to be identified now and investments have to be made in the education and training of those employed, both at national and at state level. Dr. Guido Zimmermann is sure that the type of contents to be taught will change appreciably: "For example, Excel or programming skills will become less important as a result of ongoing automation, as technologies such as artificial intelligence will increasing assume such tasks." On the other hand, the focus could be placed more on humanities and social skills, i.e. on properties which are considered particularly "human" – and deployed in teaching or in care.

In general, there is a common requirement for schools, universities and companies for establishing a new education system. Education and training must be aligned to the challenges of digitalization, empowering employees to repeatedly acquire new special abilities. After all, a person who is 16 today will probably work until he is 75 and in this time do six different jobs with some very different job profiles. For this he needs a wide range of abilities which need to be examined and expanded on an ongoing basis. "On the other hand, routine jobs on which the middle class is largely based today will become more and more infrequent as time passes, " states Dr. Guido Zimmermann.

The Country Needs a New Social Policy

Parallel to digitalization there will also be huge changes in society and in politics, something which cannot be regarded highly enough. For example, in the area of work, politicians must find answers on how to deal with the reduction of jobs and a drastically changing work environment. It is true that in this connection at municipal level LBBW supports practice-related studies, for example on universal basic income. However, such a model, which also finds favor from some corporate managers, has three key weaknesses from the perspective of LBBW. It includes incentives whose extent cannot be forecast; it seems almost impossible to finance in a serious fashion; ultimately it also results in dismantling the social state.

Another interesting model is the so-called social account for each citizen on which monetary and non-monetary points (for example for not-for-profit activities) can be collected and withdrawn. Such an account would have the advantage that people would be pushed to take individual responsibility, as they would have to budget with their points. However, the administrative work would be enormous and the state would still have to support those in need, despite any social accounts.

The right answer has not yet been found to respond to the social and political questions for the future. For this reason, LBBW considers it necessary to maintain open discussion and a competition for ideas in which politicians, companies and citizens all take part so as to achieve a broad consensus accepted in society.

The Digital Transformation in Germany Can Be Successful

Even if the challenges for society and business for the future are large - as one of the most strongly performing and most innovative economies in the world, Germany has excellent starting conditions for successfully coping with the digital transformation. It is important now not to compromise the advantage and not sleep though the technological progress. This means that the political side must push forward the expansion of the digital infrastructure across Germany in a very strong fashion, creating a future-driven education system together with the corporations and creating the conditions for more flexible labor markets and a social policy which is stable on a long-term basis. If these criteria are met, Germany as a business location will be one of the winners of the digital transformation – in terms of both the companies and also the employed. This is not a bad outlook for Germany in general – and Tuttlingen on the Danube in particular.

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