The German chemical industry has long been one of Germany's flagship industries. This was important for Germany as an industrial centre, as the sector, which has been dubbed the "mother of all industries", is at the beginning of every value chain. The fact that German chemical companies have succeeded in gaining a leading position in the global market is all the more remarkable given that Germany does not have any significant raw material deposits and was not blessed with favourable energy costs in the past. The industry was only able to compensate for these disadvantages thanks to innovations.

Now, however, the turning point seems to have been reached. "The chemical industry in Europe is confronted with two decisive comparative competitive disadvantages: the comparatively high energy costs and the regulatory environment," says Harald Schwager, who is responsible for innovation on Evonik's Executive Board. It doesn't matter whether we are talking about gas or electricity prices, as both energy sources have exploded in price since mid-2021.

At the same time, the gap to important competitor regions has widened noticeably. According to the German Chemical Industry Association (VCI), the electricity price for large consumers with a consumption of more than 150,000 megawatt hours (MWh) was 15.9 cents per kilowatt hour (KWh) in Germany in the first half of 2023. Only 4.4 cents/KWh had to be paid in the USA and 9.1 cents/KWh in China. Even in France, only 8.9 cents/KWh had to be paid.

According to Schwager, this is also politically motivated: "In Germany, people still believe that only expensive energy is good energy. The ideology behind this is that this is the only way to get companies to work on their energy efficiency." A fallacy: In view of the high prices, the industry actually consumed less energy last year. However, as the plants were less heavily utilised, the energy efficiency per product deteriorated, explains the chemist.

Moreover, Germany has a devastating carbon footprint for energy because much coal-fired electricity is used. "If a company already has a higher CO₂ footprint due to its energy consumption, this will affect the entire value chain," explains Bernd Elser, Global Lead for Chemicals and Natural Resources at Accenture, adding: "The energy issue is fundamental to the discussion, both from a cost and CO₂ perspective."

The second point holding the local chemical industry from competing is regulation. "Regulation has meant that there is hardly any research being carried out in Europe in some research areas, such as red and green biotechnology. In these areas, the research infrastructure, which includes the university landscape, has moved away," says Schwager. The EU Commission now seems to have recognised that Europe cannot decouple itself from the rest of the world regarding genetic engineering. However, the draft legislation on the use of genetic engineering in agriculture presented in the summer has met with widespread resistance.

Schwager now fears that white biotechnology - i.e. the use of bacteria or enzymes to convert organic substances - is facing a similar fate. The process known as fermentation has turned out to be a technology with great potential. Sooner or later, however, it will be a matter of modifying the bacteria so that they produce as much as possible. This can only be achieved by optimising the bacterium's DNA. Strictly speaking, the bacterium would then be subject to the regulation of genetically modified organisms.

However, it is also true that the innovative strength in other regions has increased, so the relative importance of Germany/Europe has decreased. The best example of this is China, which now accounts for 40% of global chemical production. In terms of R&D expenditure, Germany is still the fourth-largest centre of chemical innovation behind the USA, China and Japan, according to data from Chemdata International.

However, patent applications, regarded as a leading indicator, confirm that Germany is losing its innovative strength. In an international comparison, the Federal Republic now only ranks fifth in its share of global chemical and pharmaceutical patent applications. Just over ten years ago, Germany was still in the top three.

If we narrow the focus to R&D expenditure in the chemical industry, excluding pharmaceuticals, China is the sole leader with R&D expenditure of 21.8 billion euros (2022), ahead of the USA (12.7 billion euros). However, the high research expenditure in the People's Republic does not necessarily come from Chinese coffers; the global chemical industry also conducts research in China.

"The innovative strength of the German chemical industry is enormous. Companies continue to invest, but not necessarily in Germany," Elser asserts. This is because innovation occurs when the economy is growing. "In comparison to North America, Southeast Asia, or even Japan, Europe is currently experiencing a period of weakness," notes the Senior Managing Director.

"When deciding on a research location, the question always arises about the associated ecosystem," Schwager says, pointing to research in battery technologies: "The preferred location is Shanghai because production primarily takes place in Asia." Due to short innovation cycles, speed plays a significant role.

The outdated infrastructure of capital-intensive industries in Germany serves as another impediment. While it's undisputed that the use of fossil fuels has no sustainable future, research is focused on finding alternative raw materials that can be utilized within the existing infrastructure.

The proven concept of industrial integration over decades also advocates for utilizing the installed infrastructure. 'The integrated concept is more relevant than ever. The challenge lies in redefining the integration, even at the level of products and individual molecules. Ultimately, the integration needs to be restructured,' said Elser. While the idea of a circular economy has been discussed for years, many necessary processes are not yet in place or defined.

For Schwager, the circular economy is a future-oriented topic, even though its implementation takes time. 'The transformation of 150 years of industrial history, during which an infrastructure based on fossil fuels emerged, doesn't happen overnight,' illustrates the chemist.

However, Schwager doesn't see this as a disadvantage for the research landscape in Germany. The manager also relies on regulators coming to an understanding because "Germany can only continue to be successful in the chemical industry if we research in areas that can withstand the existing energy policy and regulatory conditions".