Germany Can Handle Crises - But Can it Also Handle AI?

In the international media, the headlines about the recent German elections on September 26, 2021 were mostly about the candidates, parties, July floods, Afghan crisis, and the ongoing pandemic. Yet, the outstanding challenge for Germany is maintaining its economic competitiveness and high level of innovation in order to secure its export powerhouse status and high standard of living.

The lack of a digital infrastructure that underlies AI has long been an issue in Germany. The pandemic was another wake-up call, further underscoring Deutsche Telekom’s historic blunder of trying to push broadband connections through old cables. Neither work nor education at home went smoothly for a country that ranks in the teens on digital readiness indices while being the third biggest exporter in the world. Among the Mittelstand, the small-and-medium-size champions of Germany’s economy, which provide 60 percent of employment, only 6 percent have implemented AI strategies to stay competitive. Despite tech hubs in Berlin, Cyber Valley, Hamburg, and Munich, the rate of start-ups, a crucial indicator of digital economy, remains low.

Is Germany missing out on the data wave?

AI goes beyond a digital infrastructure and has unique specifications.  At its core, AI is about data and the way machines learn from data through algorithms. In economic terms, data flows and utilization influence all transactions and relationships including maintaining competitiveness through novel products, value-chain coordination, and customer relations. Start-ups produce novelty. Tech skills are key to harnessing all potential benefits from AI.

German and EU policies may not be aligned correctly with data storage, flows, and utilization – and the development of algorithms. The EU’s proposed Digital Markets Act and the Artificial Intelligence Act both intend to jump-start or boost big firms in Europe through digital protections and regulations. Data privacy regulations, while necessary and important for human rights, may not provide incentives to firms for innovation.  For example, the legal status of data flows such as for simulations and reinforcement learning is unclear and hampers the development of algorithms. The confusion about data privacy has also thwarted the rollout of healthcare apps in Germany for physician care and pharmacy prescriptions.

German minister Peter Altmaier’s signature initiative is the development of a GAIA-X platform for storing data on a platform other than i-Cloud or Alibaba. Yet this misunderstands the German industry’s concerns about cyberespionage, which are more about hacks and engineering than digital nationalism through an alternative platform. Industry executives and academics I interviewed criticize Altmaier for misaligning policy with problems and incentives.

Dare more Cyber Valley

Nevertheless, great transformations are underway in German AI ecology that include micro policy measures; they may envisage better overall winds than the signature policies described above. The ecology of the German AI landscape may lie in its historically competitive industries and the way they have worked through their R&D and innovation efforts in the past. This includes fast catch-up in the automobile industry to develop electric cars and apps, the development of AI for lubricating value-chains in chemicals and pharmaceutical industries, or the way businesses such as Trumpf and Würth have led in adopting and innovating with AI technologies. Würth increased sales in the pandemic year, as did car manufacturers such as Daimler-Benz that rely on sheet metal innovations from Trumpf. 

German car manufacturers now note with confidence that emulating Tesla and its AI platform is not an option for them. They argue that they are not just retrofitting AI to their existing “electro-mechanical” base, but rather forwarding innovations that their customers would welcome and understand as a familiar brand. 

Germany lacks world class doctorates in data science and mathematics, though the shortages may be less burdensome among the bigger players among the larger firms in German AI networks.  Cyber Valley in Baden-Wuerttemberg, a network created in 2016, includes two universities, a Max Planck Institute, two Fraunhofers, and a variety of businesses that involve non-German businesses such as Amazon and Google. While embodying the German equivalent of Silicon Valley in California, Cyber Valley is also uniquely German in the mix of public, private, and research institutions involved. That may be its strength in aligning innovation with institutions.

Germany undergoes collective economic angst every 20 to 30 years or so but re-emerges the better for it. The Wirtschaftswunder, for example, was expected to end in the 1970s. Germany was the sick man of Europe in the 1990s. Now the crisis is AI. Each time the social market economy cushioned shocks, workers agreed to adopting new technologies (more or less), and bold policy measures rescued German exports. The euro, for example, provided German exports a competitive advantage by de facto depressing the value of the Deutsche Mark.

German solutions for the digital age

All unhappy times are different. This time the misalignments may be in policy and incentives, and the slow catch-up among the Mittelstand for AI, or perhaps the slow rate of start-ups. But the answer as before will lie in the way that the old Germany of manufacturing adopts to the new Germany of Industry 4.0. Rather than bold measures that capture headlines from Berlin or Brussels, the way forward would include the following: clarify data laws, provide incentives to large and small businesses to implement machine learning, and encourage technology clusters. 

As before, the happiness of Germany’s future will lie in fashioning German solutions. The current landscape of digital protections and bombastic measures may misunderstand German industrial ecologies. Thankfully, German society and industry sees both the writing on the wall and the missing opportunities. May the best coalition emerge on election day!

This article was first published in Der Tagesspiegel.