1 © 2019 International Bank for Reconstruction and Development / The World Bank Group 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Any queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org. Icons in Figures 1 and 24 are made by Freepik (https://www.freepik.com/), photo3idea_studio (https://www.flaticon. com/authors/photo3idea-studio), Darius Dan (https://www.flaticon.com/authors/darius-dan), and surang (https://www. flaticon.com/authors/surang) from www.flaticon.com and are licensed by Creative Commons BY 3.0. Manufacturing a Startup: a case study of Industry 4.0 development in the Czech Republic Anwar Aridi and Daniel Querejazu June, 2019 CONTENTS ACKNOWLEDGEMENTS 2 1. INTRODUCTION 3 1.1. Study Objectives 4 1.2. Conceptual Framework 4 2. WHY THE CZECH REPUBLIC AND INDUSTRY 4.0? 6 2.1. Need for innovation and productivity improvements in the Czech Republic 6 2.2. Industry 4.0 Overview 7 2.3. Potential Industry 4.0 Impacts 8 3. ANALYSIS 9 3.1. Czech Industry 4.0 Knowledge Base 9 3.2. Czech Industry 4.0 Startups: Potential in the Making 15 3.3. Industry 4.0 Adopters: Necessity vs. Experimentation 23 3.4. Framework Conditions 25 3.5. Public Support for Industry 4.0 in CR 28 4. RECOMMENDED POLICY ACTIONS 30 APPENDIX I. METHODOLOGY 33 REFERENCES 34 1 ACKNOWLEDGEMENTS This research is prepared by Anwar Aridi (Private Sector Specialist, World Bank) and Daniel Querejazu (Innovation Policy Consultant) as a background paper for the World Bank Europe 4.0: The Promise of Digital Transformation Flagship report (forthcoming). The authors are grateful to the Europe 4.0 Flagship task team leaders Mary Hallward-Driemeier and Wolfgang Fengler; Nelson Gray, Viktor Kveton, Anne Ong Lopez (WB consultants); and Vojtech Kadlec, Vojtech Nosek, and Marek Stepan (UNICO.ai) for the input and valuable comments. We also thank all the interviewees and the entrepreneurs who took the time to answer our questions and the survey. 2 1. INTRODUCTION This paper investigates the current state of creation The focus on I4.0 startups in the Czech Republic and adoption of Industry 4.0 (I4.0) technologies is meant to highlight the importance of these within the Czech Republic. I4.0 technologies, which agents in enabling the country to ride the include technologies such as big data analytics, next wave of innovation through bridging the cloud computing, the Internet of Things, and digital-physical divide promised by the digital advanced robotics, hold great promise for increasing revolution.1 Innovative startups and the high growth the economic competitiveness of adopters. These subset of new market entrants tend to introduce technologies are also often discussed in terms of disruptive innovations to the marketplace. In this their potential to disrupt existing business models case, I4.0 startups are unique as compared to regular and value chains, particularly in the manufacturing ICT-based startups, because their innovations are sector. usually engineering and science-based and thus are inherently riskier. This report analyzes the lifecycles The Czech Republic presents an interesting case of startups creating I4.0 technologies in the Czech study for I4.0 technology creation and adoption: the Republic, exploring the startups’ knowledge origins, country boasts one of the strongest manufacturing their pathways to markets and customers, and the sectors in Europe relative to the size of its economy unique challenges they face within the context of but suffers from low productivity and an increasingly the Czech business environment. The emerging acute labor shortage. To remain competitive in the challenges are summarized in the table below. global economy and avoid the middle-income trap, the Czech Republic has a critical need for The case study approach offers a comprehensive technologies that can substitute labor through picture of the I4.0 knowledge landscape, challenges automation and increase the productivity of the and enabling factors of the technology adopters, and existing workforce. the operating environment where these interactions take place. 1 The number of startups based on I4.0 technologies is growing globally, as highlighted in the 2019 Global Startup Ecosystem Report, which found that Advanced Manufacturing & Robotics and Artificial Intelligence were two of the fastest growing startup sub-sectors: https:// startupgenome.com/reports/global-startup-ecosystem-report-2019 3 Figure 1. Key Challenges Faced by I4.0 Startups Prototyping and demonstration Data accessibility Managerial capacity opportunities Market access I4.0 Accessibility and [through piloting] startup retention of Talent Underdeveloped Technology Long procurement risk finance integration and timelines opportunities interoperability 1.1 Study Objectives The objective of this work is to examine the development of these startups and could hinder lifecycle of Czech I4.0 startups, with the intent to both entrepreneurs and investors from entering this understand their knowledge, market access, and potentially promising space. scaling challenges. Our key assumption is that I4.0 startups face a unique set of uncertainties related In this case study, we aimed to understand: to their technologies, customers, investors, and •• How does the Czech Republic fair in terms of its business environment they operate within. These I4.0 knowledge base and research collaborations? startups have to overcome substantial “knowledge gaps” when it comes to the development of their •• How do I4.0 startups develop their technologies/ technologies and solutions (from invention to services and access customers, markets, and innovation), accessing their markets (piloting to investors? show results), and scaling (finding smart investors •• Finally, what are the set of policies and support and connecting to value chains). These information instruments that could overcome the uncertainties asymmetries represent a series of roadblocks to the and challenges of I4.0 startups? 1.2 Conceptual Framework To answer the questions above, we developed an and environment. Thus, the framework, shown in ecosystem-based analytical framework to guide our Figure 1, takes an ecosystem-level view of the I4.0 analysis. We aim to not only capture the internal technology lifecycle from the perspective of Czech workings of I4.0 startups, but also understand their startups. sources of external knowledge, markets, customers, 4 Within this framework, information flows through intensive I4.0 solutions, adoption may require a direct and indirect pathways between research number of enabling factors: organizations, I4.0 solutions providers (including •• adopters may need to understand their own data startups and large incumbents), and I4.0 adopters. and process challenges (Schröder 2016); Direct knowledge transfers include research collaborations; licenses; and purchases of intellectual •• adopters may need information about what property; while indirect transfers include students, I4.0 technologies can do (McKinsey 2015, researchers, professors transitioning into industry; PricewaterhouseCoopers 2016, Ren et al. 2015); dissemination of research through publications, •• adopters may need skills and expertise (in presentations, and conferences; and through analysis, forecasting, automation, etc.) to make informal discussions between framework actors. use of I4.0 technology outputs (Kagermann et al. 2013, PricewaterhouseCoopers 2016, McKinsey The I4.0 market consists of a wide range of potential 2015, Walendowski et al. 2016); adopters of I4.0 technologies. I4.0 solutions providers and startups sell their solutions through •• and/or adopters need the capacity to transform direct sales to end users (B2C) and/or through company processes and value chains (Schröder B2B business models. Both sets of actors may 2016, Sommer 2015, Moeuf 2018). need access to data and/or access to industrial/ manufacturing equipment and processes to be able This report follows a case study approach to describe to develop their I4.0 solutions.2 the experiences and lifecycles of Industry 4.0 startups in the Czech Republic. Appendix I includes For some I4.0 solutions, adoption is a simple “plug a description of the methodology, data sources, the and play” process. For more complex and/or data survey and interviewed stakeholders. Figure 2. Case Study Framework: Czech I4.0 Actors, Networks, and Enabling Conditions PARTNERSHIPS, NETWORKS, PUBLIC SUPPORT Global Digitization Firms as I4.0 Adopters Enabling Factors: Trends •• I4.0 awareness and I4.0 strategies Global I4.0 Consumers Solutions •• Change and Data (Czech and management Business Providers Global) •• Digital skills R&D •• Integration into processes CZ Entrepreneurial Knowledge Providers Environment University Research Czech I4.0 Centers Public Direct & Indirect Research Startups Knowledge Flows Institutions Sources: authors. 2 I this paper we are mainly focused on B2B and firms as adopters. 5 2. WHY THE CZECH REPUBLIC AND INDUSTRY 4.0? Need for innovation and productivity improvements in the 2.1 Czech Republic The manufacturing sector is a critical part of productivity levels and only above Poland among the Czech economy, leading all sectors of the its regional peers. The Czech Republic has also economy in terms of employment and gross value seen low labor productivity growth, experiencing added. The manufacturing sector made up 28.6 lower growth than Poland, Hungary, and Slovakia percent of the value added by the Czech economy in from 2016 to 2018.4 Czech SMEs, in particular, drag 2017, well above the EU average of 16.4 percent and down the country’s labor productivity, with small highest among its regional peers.3 Manufacturing, firms experiencing about half the labor productivity particularly automotive manufacturing, has grown of larger Czech firms.5 in size and importance due, in large part, to the high levels of net foreign direct investment (FDI) The Czech Republic is also facing an increasingly that the Czech Republic received in the 1990s and acute labor crunch. It had an unemployment rate early 2000s. of 2.4 percent in 2016, the lowest in the EU and well below the EU average of 8.2 percent.6 Labor While the manufacturing sector and the rest of shortages, especially among blue collar workers, are the Czech economy have been growing in recent a growing concern for Czech employers. In 2018, 45 years, the Czech Republic is challenged by weak percent of Czech manufacturers and 40 percent of labor productivity and labor productivity growth. builders cited labor shortages as a factor limiting Labor productivity per hour worked was USD $38 production.7 in 2017, around 60 percent of German and Austrian 3 World Bank national accounts data, and OECD National Accounts data 5 OECD (2017), Entrepreneurship at a Glance 2017, OECD Publishing, files. https://data.worldbank.org/indicator/NV.IND.MANF.ZS (Accessed Paris, https://doi.org/10.1787/entrepreneur_aag-2017-en on 5 March 2019) 6 World Bank national accounts, https://data.worldbank.org/indicator/ 4 The Conference Board, “Total Economy Database: Growth Accounting SL.UEM.TOTL.ZS (accessed March 5, 2019) and Total Factor Productivity, 1950-2016”. (November 2018) 7 2018 European Business and Consumer Survey 6 The Czech Republic, having achieved modest Observatory of Economic Complexity’s Economic productivity gains through attracting FDI in the Complexity Rankings.8 However, automation and previous two decades, is now at risk of falling into digitization through the adoption of Industry 4.0 the middle-income trap (MIT), whereby it can no technologies will be key to increasing nationwide TFP, longer compete internationally in labor-intensive while human capital accumulation, in the form of ICT industries because wages have increased, but it can and STEM skills, is a critical enabler of the adoption also not compete in higher value-added activities of Industry 4.0 and other digital technologies (Glawe because productivity is too low (Gill and Kharas and Wagner 2018, World Bank 2016, Russman et al. 2007). The Czech Republic already has a high degree 2015). of export complexity, ranking fourth in the EU in the 2.2 Industry 4.0 Overview The term “Industry 4.0” originated with the German This paper adopts the three categories of Industry government as part of a national high-tech initiative 4.0 technologies utilized by the World Bank’s Europe launched in 2011. There is no single agreed upon 4.0 framework: informational, operational, and definition of Industry 4.0. The concept is sometimes transactional technologies. used interchangeably with the term “The Fourth •• Information technologies take advantage of the Industrial Revolution” which is characterized by exponential growth of data to reduce the costs a fusion of technologies that is blurring the lines of computing, transactions, and coordination. between the physical, digital, and biological This goes beyond the spread of computers and spheres. (Schwab 2016). Industry 4.0 is most often the Internet and includes big data analytics, described as increased digitization and automation cloud computing, IoT, artificial intelligence, and in the manufacturing environment (Oesterreich and machine learning. Teuteberg 2016, Kohler and Weisz 2016, Roblek et al. 2016), and much of the literature characterizes •• Operational technologies combine data with Industry 4.0 as the integration of manufacturing automation to reduce the importance of labor value chains through digitization (Kagermann et al. costs in determining competitiveness and 2013, Dombrowski and Wagner 2014, Geissbaue enable greater customization. This includes et al. 2016). robots and 3D printing, which can disrupt the current structure of global value chains based Industry 4.0 and the Fourth Industrial Revolution on specialization, scale economies and low labor are umbrella terms that cover a set of technologies costs. related to cyber-physical systems and broader •• Transactional technologies combine data access to advanced computing power, covering with market exchange to reduce information technologies such as the Internet of Things (IoT); asymmetries and, therefore, the costs of matching artificial intelligence and machine learning; data buyers and sellers. This matching process, analytics; cloud computing; robotics, 3D printing, enabled by e-commerce platforms, the sharing and other advanced manufacturing technologies. economy, and blockchain, creates new markets. 8 MIT. The Observatory of Economic Complexity. https://atlas.media.mit. edu/en/rankings/country/eci/ (accessed March 20, 2019) 7 2.3 Potential Industry 4.0 Impacts A review of Industry 4.0 literature identifies three Disruption of existing value chains and business primary areas where Industry 4.0 technologies models: Industry 4.0 technology adoption may impact adopters: operational improvement; the enable firms to integrate their horizontal and disruption of existing value chains and business vertical value chains (Kagermann et al 2013) and models; and the demand for skills. lead to the creation of new value chain activities, such as product data analytics and data security Operational improvement: Operational (Porter and Heppelmann 2016). Adoption may also improvements can be achieved through value enable new business models that employ more “as- chain digitization and integration, which results a-service” offerings (Porter and Heppelmann 2016, in accelerating and optimizing firm processes Jazdi 2014, Dujin et al 2014, Foidl and Felderer) (Kagermann et al 2013, Dombrowski and and allow for more customization of products and Wagner 2014, Geissbaue et al 2016). Industry 4.0 services (Dombrowski and Wagner 2014, Kohler technologies can also improve firms’ decision- and Weisz 2016). Industry 4.0 technologies may making and forecasting capacities, allowing firms also allow closer interaction with customers and to make decisions and predictions based on real- the adaptation of business models to more closely time data and big data analysis (Espejo and Dominici mirror market requirements (Geissbaue et al. 2016) 2016, Posada, et al. 2015). Automation will allow firms to substitute labor and reduce costs (Autor & Changes in demand for skills: adopting Industry Salomons 2018, Espejo & Dominici 2016, Roblek 4.0 technologies will increase demand for ICT and et al. 2016), while advances in human-machine STEM skills, as well as interdisciplinary thinking, interaction will allow workers to interact with and reduce demand for unskilled labor (Glawe and equipment more efficiently (Posada, et al. 2015). Wagner 2018, World Bank 2016, Rüssmann et al. 2015). 8 3. ANALYSIS Our analysis investigates components of the Republic, 2) Czech I4.0 Startups, 3) Czech I4.0 framework presented in Figure 1, consisting of Adopters, 4) Framework Conditions, and 5) Public five sections: 1) I4.0 Knowledge Base in the Czech Support for I4.0. 3.1 Czech Industry 4.0 Knowledge Base In this section, the Czech Republic is benchmarked of its more developed regional peers, Germany against other EU countries in terms of publication and Austria, as well as below the normalized EU and patent outputs related to I4.0 technologies.9 averages. Research and development (at least those While publications and patents do not directly I4.0 R&D projects performed with some share of translate to new startups and commercialized public funding) is largely concentrated among a few products and services, these outputs indicate the universities in Prague and Brno, though there are a size of a country’s knowledge base and provide large number of private sector companies that have indicative information about the absorptive capacity participated in collaborative research projects with of the internal market for I4.0 technologies. local universities and public research institutions. Overall I4.0 knowledge creation in the Czech The share of I4.0-related publications has grown in Republic, in the form of I4.0 publications and the Czech Republic, rising from about 1 percent of patents, is relatively modest – below the outputs all publications in 2011 to over 2 percent in 2018. 9 For the analyses included in this section, I4.0-related technologies comprise Internet of Things (IoT), Artificial Intelligence, Machine Learning, Big Data Analytics, Cloud Computing, Robotics, and 3D Printing. Transactional technologies (blockchain, e-commerce platforms, etc.) are not typically patented, and thus were not included. 9 Figure 3. Number of Czech publications and share of I4.0-related Czech publications, 2010-2018 16000 3.0% 13,760 14,409 14,770 13,224 Share of I4.0 publications (%) 14000 2.5% Number of publications 11,452 2.6% 12000 2.5% 10,060 10,458 2.4% 2.0% 10000 8,951 9,407 2.2% 1.9% 8000 1.5% 1.6% 6000 1.3% 1.2% 1.0% 4000 1.0% 0.5% 2000 115 96 125 171 224 319 353 386 328 0 0.0% 2010 2011 2012 2013 2014 2015 2016 2017 2018 I4.0 Publications Other Publications Share of I4.0 Source: Web of Science. However, despite the growth in I4.0-related regional peers for I4.0-related publication outputs publications, the Czech Republic ranks below the – above Hungary, Poland, and, Slovakia; but below normalized EU average and in the middle of its Germany and Austria. Figure 4. Number of I4.0 publications relative to population, EU countries with more than 500 I4.0- related publications, 2010-2018 (Publications per 1 million population) Notes: Population numbers as of 2017. 485 401 385 365 364 358 319 305 300 267 264 244 233 231 228 200 169 158 157 152 110 99 HU PL SK RO HR FR CZ DE EU IT ES BE NL GR UK DK AT PT IE SE SI FI Source: Web of Science, Eurostat. 10 Like many Central and Eastern European countries, Czech patents tend to focus on operational the Czech Republic’s overall patent outputs are low technologies (robotics and 3D printing) more so relative to Western Europe, the US, and Japan. This than informational technologies (Internet of Things, is in part due to the practice of “off-shoring” patents, Artificial Intelligence, Machine Learning, Big Data whereby patents created by domestic subsidiaries Analytics, Cloud Computing), with 95 operational are often registered under the subsidiaries’ holding patents registered to Czech assignees between companies abroad.10 2000 and 2018, compared to 59 informational patents. The dominance of operational technology Despite this, patent activity around I4.0-related patents could also be explained by the nature of technologies in the Czech Republic has been informational technologies, which is usually less increasing in number of patents and in the overall patentable and rely mainly on other IP protection share of patents in the since 2010. The share of I4.0 business models, such as market capture, control patents has increased from 2 percent is 2012 to over of standards, data ownership, trademarks, and 12 percent in 2018. copyright. Like publications, the Czech Republic lags behind the normalized EU average and its peers Germany and Austria in the number of I4.0 patents, as shown in Figure 5.11 Figure 5. Number of Czech patents and share of I4.0-related Czech patents, 2010-2018 Notes: Only active patents included in analysis, years according to earliest publication date 400 371 346 14% 315 318 350 296 12% Share of I4.0 patents (%) 300 247 12.7% Number of patents 10% 250 211 08% 200 157 170 7.8% 06% 150 6.5% 7.5% 6.5% 7.7% 3.4% 2.3% 2.4% 04% 100 46 02% 50 20 22 25 29 11 6 5 9 0 00% 2010 2011 2012 2013 2014 2015 2016 2017 2018 Industry 4.0 patents Other patents Share of I4.0 patents Source: Orbit by Questel. 10 The patent offshoring impacts of the foreign ownership-subsidiary relationship among Spanish firms was recently explored by Tamayo and Huergo (2017). 11 The national rankings in Figure 5 are likely somewhat skewed by corporate patenting patterns related to national IP policies and tax laws, which may lead corporations to patent in countries with lower corporate and royalty taxes. EU countries that likely benefit from these patenting patterns include Luxembourg and Cyprus (ranked 1 and 9 respectively in Figure 5). See Dischinger and Riedel (2011) and Karkinsky and Riedel (2012) for further discussion on this topic. 11 Top Czech Organizations in I4.0 and workforce optimization solutions; and Skoda Knowledge Creation Auto, a Czech automotive manufacturer and subsidiary of the Volkswagen Group. Publicly available data on Czech I4.0 R&D projects shows that R&D activity is largely concentrated among a few universities in Prague and Brno. The Research Collaborations Czech Technical University in Prague (CTU), home of the Czech National Centre for Industry 4.0 and A network analysis of patent collaborations (for the Czech Institute of Informatics, Robotics and patents with more than one assignee), as can be Cybernetics, is the leading center for I4.0 R&D in seen in Figure 6, shows Czech Technical University the Czech Republic, followed by the Brno University of Prague (CTU) as the most active collaborator in of Technology. the Czech I4.0 patent space; unsurprising, given that the university also holds the largest number of The CTU is also the top performer in the country for I4.0 patents in the country. The network also shows patent outputs, but notable Czech private sector that, aside from patent collaborations involving actors also rank highly, including Avast Software, CTU, the most common linkages are among private a Czech cybersecurity firm; Zoom International, a companies. Czech company developing customer management Table 1. Top R&D institutions in Industry 4.0 by number of R&D projects, Czechia, 1991−2019 Publicly Contractual R&D institution name Location funded R&D Research Projects Projects Czech Technical University in Prague / Faculty of Electrical Prague 160 36 Engineering Brno University of Technology / Faculty of Electrical Engineering Brno 60 21 and Communication Technical University of Liberec / Institute for Nanomaterials, Liberec 15 51 Advanced Technology and Innovation Charles University in Prague / Faculty of Mathematics and Physics Prague 58 3 Czech Technical University in Prague / Faculty of Mechanical Prague 44 17 Engineering Brno University of Technology / Faculty of Information Technology Brno 42 14 University of West Bohemia / Faculty of Applied Sciences Pilsen 37 6 Brno University of Technology / Faculty of Mechanical Engineering Brno 33 8 Institute of Information Theory and Automation of the Czech Prague 34 0 Academy of Sciences VSB - Technical University of Ostrava / Faculty of Electrical Ostrava 31 3 Engineering and Computer Science Source: Starfos TACR. 12 Figure 6. Number of active I4.0 patents relative to population, EU countries, 2019 (Number of patents on 100,000 population) Notes: Only active patents included, population numbers as of 2017. 88.2 61.2 54.5 53.7 41.6 37.5 25.8 25.4 22.8 21.0 20.7 19.3 16.6 13.2 6.3 6.0 3.6 3.0 2.0 1.5 1.3 1.3 1.2 1.0 1.0 0.8 0.8 0.7 0.2 RO LV HR PL BG SK GR HU LT PT CZ SI ES EE IT UK BE EU MT FR CY DK AT IE NL SE DE FI LU Source: Orbit by Questel, Eurostat. Table 2. Top institutions in Industry 4.0 according to number of patents, 1999−2019 Name of the institution Type of Org Number of patents Czech Technical University of Prague University 24 Avast Software Company 15 Zoom International Company 13 Rieter Company 8 Robotsystem Company 7 Robe Lighting Company 6 Skoda Auto Company 5 Brno University of Technology University 4 Moravsky Vyzkum Company 4 IQRF Technology Company 4 Source: Starfos TACR. 13 Figure 7. Network patent space in Industry 4.0, Czech Republic, 1999−2019 Notes: Only active patents included in the analysis; red indicates R&D institutions, blue indicates companies, green indicates others; edge width illustrates number of patents among two subjects (range 1-3); circle size and label size illustrate number of patents (range 1-8). 14 Source: Orbit by Questel. Figure 8. Network R&D collaboration space in Industry 4.0 among most active collaborators, Czech Republic, 1991−2019 Notes: red indicates R&D institutions, blue indicates companies, green indicates other; edge width illustrates number of collaborations among two subjects (range 2-8); circle size illustrates number of unique partners in collaboration (range 1-25) and label size illustrates absolute number of collaboration (range 9-86); repeated collaborations 15 Source: Starfos TACR. A network analysis of research collaborations, as Certicon (software development, embedded can be seen in Figure 7, shows that collaborations systems development and hardware design), VÚTS are concentrated among five universities: CTU- a.s. (spectrum R&D services), Neovision (robotics), Prague, University of West Bohemia, VSB - Technical Gaben (RFID sensors), and Speechtech (automated University of Ostrava, Brno University of Technology, voice solutions). The local nature of these research and Technical University of Liberec. However, the and patenting collaborations between universities network includes a large number of actors from and local firms corroborate with evidence from across the Czech ecosystem, including large other OECD countries that proximity matters for participation from the private sector (486 private knowledge flows between industry and academia. companies), as well as 157 university faculties Evidence from the US has shown that citations from and public research organizations, and 73 other industry patents to university research publications, types of organizations (including hospitals, NGO, for instance, increase with proximity to those government ministries, etc.). universities (Jaffe, Trajtenberg, and Henderson, 1993) and this remains the case with the dominance The center of the network includes a cluster of private of digital technologies and reduction in the cost companies on the supply side of I4.0 technology of communication (Figueiredo, Guimarães, and development, including Camea (camera systems and Woodward, 2015).12 sensors for transportation and industry solutions), 3.2 Czech Industry 4.0 Startups: Potential in the Making Characteristics of the I4.0 Startup 81 percent offering at least one informational Population in the Czech Republic technology. 24 percent have at least one operational technology (robotics and 3D printing) and 5 Through interviews with stakeholders in the Czech percent have at least one transactional technology ecosystem, a population of 54 startups was identified (e-commerce platforms and blockchain). that had marketed one or more products/services based on an I4.0 technology. Of the 21 startups that Founders of Czech I4.0 startups generally have responded to the survey, most were generally small prior professional experience, often in the fields in size, with 88 percent of the surveyed companies of data science, analytics, or artificial intelligence. having fewer than 50 employees, and 71 percent Several interviewed founders started their having annual revenues of less than CZK 25 million companies after coming up with a new business (approximately $1.1 million). idea over the course of their career. Stakeholders noted that, because I4.0 solutions generally Informational technologies (Internet of Things, target manufacturing and industry applications, Artificial Intelligence, Machine Learning, Big Data it is valuable for founders to have at least some Analytics, Cloud Computing) are the most common knowledge of these applications and processes technology offered by surveyed companies, with when developing their products and services. 12 OECD, 2019. “University-Industry Collaboration: New Evidence and Policy Options”. http://www.oecd.org/fr/innovation/university-industry- collaboration-e9c1e648-en.htm 16 Figure 9. Number of employees of surveyed Figure 10. Annual revenues of surveyed startups startups 1 1 3 2 6 9 5 12 9 1-10 11-50 51-250 More than 250 Pre-revenue Less than 2,5 million Kč 2,5 million Kč – 25 million Kč 25 million Kč – 500 million Kč 500 million Kč – 2.500 million Kč The extent to which I4.0 startups tap into the equipment, and platforms they need to develop their local knowledge base in unclear due to the technologies (see the Challenges section below) difficulties of licensing IP and spinning out from and serve as critical bridges to markets abroad by Czech universities. A large majority (78percent) of providing platforms for validating I4.0 technologies. the surveyed startups had developed a technology internally, while 38 percent had co-developed or A majority of interviewed startups found their licensed a technology from a university and 14 first customer in the Czech Republic, where they percent had co-developed or licensed a technology tested and validated their solutions. Once the from another company. However, academic spinouts solution had been validated with one or more local in the Czech Republic are hindered by institutional adopters, the startups would then seek customers issues such as complicated processes in starting outside of the Czech market. One startup founder spinouts, ineffective TTOs, and weak incentive said that getting early customers requires a local structure for the commercialization of ideas. manager or executive willing to “take a chance” Universities are generally hesitant to enter into IP on a new company and product where others will licenses with the private sector, and there are few not. Many of these startups develop case studies to university centers capable of providing business use as marketing materials, which show potential services to spinouts. The low numbers of university customers how their solution was implemented, developed or licensed technologies among the how it operates, and the benefits gained by previous surveyed startups may be due in large part to these customers – these case studies are key to helping challenges. The companies may have officially potential customers better understand the I4.0 developed the technology internally, but relied on solutions offered by startups. a large degree of expertise and know-how gained from local research organizations. For startups seeking to sell solutions to large multi-national companies, their access point into the supplier network is usually to pilot their Perception of Markets, Customers, and solution in one of the multi-national’s local plants or offices (in the Czech Republic or CEE region). Impact Transitioning into these large supplier networks is Early customers, usually found locally, often often a difficult, multi-phase process; many of the provide startups with essential access to data startups interviewed had this process brokered by and equipment for developing new solutions an early investor or facilitated by a local mid-level and are important for validating solutions for manager within the adopting company who acted as the I4.0 market. Czech I4.0 startups rely heavily on a champion for the solution within their organization. their initial customers to provide them access data, 17 While proximity to early customers appears to Piloting of the I4.0 startups’ solutions represents be very beneficial to startups, the importance of the primary gateway for adoption, and but comes proximity diminishes as I4.0 startups mature and with major drawbacks. Customer relationships gain market traction. Despite the fact that many I4.0 usually start with a pilot project to test the I4.0 startups find their early customers in the local market, solution, even for I4.0 products and services that none of the surveyed startups felt that proximity to have been successfully adopted by other firms. customers was essential to their business model Adopters feel pilots are necessary to ensure the and only 19 percent believed that proximity was solution provides its intended benefits, and, more “very important, but not essential” to their business critically, ensure that the solution will not disrupt model. Nevertheless, many interviewed founders important company processes and operations. considered proximity advantageous for establishing Pilots include an assessment period, after which and managing client relationships. the adopting company may spend some time deliberating whether to adopt at a wider scale. This The majority of surveyed companies utilized B2B pilot-assessment-deliberation process can extend business models, most often targeting manufacturers procurement timelines by years and severely restrict and manufacturing suppliers (producers of the cash flows of I4.0 startups. manufacturing equipment and platforms). 42 percent of the startups surveyed drew more than Startups perceive that their solutions impact 50 percent of their revenue from outside of the their customers most in the area of operational Czech Republic. Larger, more established startups performance. Over 80 percent of startups believed (those with more than 10 employees) tended to their solutions impacted their customers’ operational draw a higher portion of their sales from outside of performance, while about half of startups believe the Czech Republic, which aligns with the early local they impacted customers’ big data usage, decision customer story described above. It can be inferred making and forecasting capabilities, and/or that these larger startups have already validated operational flexibility. their solutions, likely either in the local or regional market, and moved on to customers in the larger EU Czech I4.0 startups largely perceive their competitors or global markets. coming from the international market, with the majority of surveyed startups perceiving that they compete with large international companies (68 percent) and/or international startups (57 percent), rather than with domestic companies. Figure 11. Types of customers targeted by surveyed startups 76% 62% 52% 24% 14% Individual Companies in non- Manufacturers Manufacturing Other consumers manufacturing suppliers industries 18 Figure 12. Surveyed companies‘ relationships with manufacturing clients 72% 67% 17% 6% Co-developing Pilot project Standard purchase Other technology agreement Figure 13. Perceived impacts on customers Operational performance 81% Big data usage 52% Decision-making and/or forecasting 48% Operational flexibility 48% Inter-company or intra-company logistics 24% User experience 19% Marketing and sales 10% No changes created 5% Other 5% I4.0 Startups [Perceived] Challenges describe data access as a major challenge. Startups said they generally acquired the data they needed from their early customers, which is reflected in the Data Accessibility survey response data. However, because access to data appears to be a prerequisite to developing A large majority (81 percent) of the startups surveyed many I4.0 solutions, failure to acquire needed data required some type of real-world data to develop likely has dire consequences for early-stage I4.0 their solutions. This data was primarily supplied by startups. The experiences related to us may represent manufacturers and manufacturing suppliers. When a degree of survivorship bias – those companies that asked whether data access was challenging for I4.0 could not get access to needed data may not have startups, most startups and stakeholders did not survived to take part in our study. 19 Figure 14. Percent of surveyed startups that required access to data to develop their I4.0 Figure 15. Source of data for surveyed startups solution(s) to develop their I4.0 solution(s) University 43% 19% research center Public research 7% institution Manufacturer 93% 81% Manufacturing 29% Yes No supplier Other 36% Proof of Concept (PoC), Prototyping, and 3.5). Like data access, the interviewed startups and Demonstration Opportunities stakeholders did not describe PoC, prototyping, and demonstration as a challenge. The startups A majority of the startups surveyed (76 percent) we spoke to generally developed with their early required some type of support to develop PoCs, customers, though one startup had made use of one prototypes, or demonstrations. Most startups of the small number of I4.0 test beds in the country had received PoC, prototyping, or demonstration (located at the Czech Technical University of Prague support from a manufacturer (64 percent), but and Brno University of Technology). However, much many received support from universities, suppliers, like the data access question, these experiences may and research institutions. Additionally, the Czech represent some amount survivorship bias – those Republic, through its Technology Agency, has made companies that were unable to develop proofs-of- available several policy instruments that support PoC concept, prototypes, or demonstrations may not and prototyping of technologies emerging from have survived to take part in our study. public research institutions (more on this in section Figure 16. Percent of surveyed startups that required support for proof-of-concept, Figure 17. Source of support for proof-of- prototypes, or demonstration concept, prototypes, or demonstration University 43% research center 24% Public research 14% institution 76% Manufacturer 64% Manufacturing 29% Yes No supplier Other 14% 20 Technology Integration and Interoperability work with third-party platform developers, such as Honeywell or Cisco. Surveyed startups said that 94 percent of the startups we surveyed said they the need to work with third-party developers to always or sometimes needed to integrate their implement their technologies raised a number of products and services into existing manufacturing challenges, including long implementation and or logistics platforms. Of those, 78 percent said this payment timelines and accessing new customers. integration always or sometimes required them to Figure 18. Challenges related to working with third-party platform developers Accessing new manufacturing customers 33% Accessing relevent data on manufacturing 17% equipment and platforms Integrating product/service into existing 75% platforms Long implementation and/or payment timelines 50% Long Procurement Timelines Managerial Capacity to Grow The frequent requirement that B2B customer Czech I4.0 startups also face many of the managerial relationships begin with a pilot and assessment and business challenges that “typical” startups period can lead to very long sales and procurement face. The Czech entrepreneurial ecosystem is still timelines for I4.0 startups. These long timelines, emerging and concentrated in few sectors with few typical for knowledge and technology intensive successful exits. Many of the required managerial products and services, can severely restrict startup skills of entrepreneurs, such as business model cash flows and negatively impact their risk capital development, team building, and sales and investment prospects. This challenge was raised marketing strategy development, are in short frequently in interviews with startup founders, as supply. Surveyed entrepreneurs perceived growth- well as investors. oriented managerial skills, such as the development of marketing and sales strategies, as the most challenging managerial task. Table 3. Management challenges faced by surveyed startups % of surveyed startups that Challenge experienced challenge Identifying a viable business model 62% Creating marketing and/or sales strategies 81% Managing logistics (including procurement, internal operations, and 24% distribution) 21 Accessibility and Retention of Talent number of investment opportunities (deal flow) and the lack of I4.0 investor knowhow. Investment rounds Talent recruitment also poses a challenge for for Czech I4.0 companies are usually larger than a Czech I4.0 startups, with 57 percent of startups typical Czech investment round, where VCs are more surveyed saying they had difficulties recruiting and/ accustomed to investing startups based on travel or retaining talented employees. While the Czech websites or SaaS. The longer sales and procurement Republic’s labor shortage is most acute in blue collar cycle mean that investors will need to wait longer workers, the market for data scientists, analysts, and to see if their investments will pay off or not. One other ICT professionals is also highly competitive interviewed investor explained that they would know (see Section 3.4). the next day if a travel startup they had invested in would get traction, whereas they might not know Underdeveloped Risk Financing Opportunities about the growth prospects of a manufacturing- focused startup for two or three years. Investors I4.0 startups face several challenges when seeking often lack the knowledge to source and vet I4.0 investment: they are usually riskier, more capital technologies – one local investor acknowledged that intensive (even at the early stage), have longer sales their VC firm initially lacked the capacity to assess cycles, and require more patient financing than a and conduct due diligence on startups developing “typical” (i.e., software-based) startup. In addition, AI and machine learning platforms and had to build in countries with young risk capital sectors, many expertise in those areas to enable them to make local investors lack the knowledge to recognize and such investments. assess some of the more complex, advanced I4.0 technologies, such as artificial intelligence-based Of the surveyed companies that received investment, solutions. This represents a challenging information they tended to rely on friends and family and public asymmetry that can hinders the startups’ abilities to funding in earlier growth stages, while venture access funding.13 capital and corporate VCs and investment funds became more important in later stages, both of There is only one active investment fund (Y Soft) which are in line with investment activity of “typical” focused on nurturing and growing I4.0 startups in the startups. Czech Republic. This scarcity could reflect the small Figure 19. Type of investment received by growth stage of surveyed startups Growth stage 14 1 1 1 3 2 Startup stage 7 4 5 3 4 2 2 Pre-seed stage 9 6 6 2 1 1 No funding received Friends and family investment Public funding Angel investment Venture capital investment Corporate VC Bank loan 13 A recent report by the EIB details the challenges facing Deep Tech startups in Europe when accessing financing. EIB, 2018. Financing Deep Tech Revolution: https://www.eib.org/attachments/pj/study_on_ financing_the_deep_tech_revolution_en.pdf 22 The Czech I4.0 startups’ exit market is nascent in 2018. A number of multinational companies and dominated by M&As. Risk investments in fast operating in the I4.0 are actively scouting, working growing startups are usually driven by the prospects with, and investing in startups through programs of successful exits. Interviewed entrepreneurs and such as Siemens’ next47, AirBus’ BizLab, and Skoda’s stakeholders reported that the typical exit strategy Digilab. for I4.0 startups is M&A – either be acquired by a large manufacturer or by an incumbent I4.0 Additionally, surveyed startups were evenly split solutions provider. In fact, there have been only between those that preferred M&A and those that two such acquisitions in the Czech Republic in the preferred to maintain private ownership of their last two years: Cleerio, which develops mapping company. This partial equity aversion combined and asset management tools, was acquired by Bio- with weak investor readiness reflect the immaturity Nexus in 2017, and Stories, developer of a business of the risk investment markets in the CR and in this intelligence AI assistant, was acquired by Workday emerging sector specifically.14 Table 4. Preferred exit strategy of surveyed companies Exit strategy % of surveyed startups Merger & Acquisition 47% Initial Public Offering 6% Maintain Private Ownership (No Exit) 47% Sewio: from local to global player who could expand their IoT capabilities. Through this partnership, Sewio found many of its initial customers, including PRAKAB, a local cable manufacturer, Sewio, a Czech startup established in 2014, has Budweiser Budvar, a Czech brewer, and Volkswagen. developed a real-time location tracking system (RTLS) using ultra-wideband (UWB) technology. Sewio relies heavily on customer testimonials and The company was founded by two researchers at case studies to show potential customers how their Brno University of Technology, who developed technology is implemented, how it operates, and the expertise in UWB while working on a research project benefits provided to previous customers – sometimes related to satellites. Realizing UWB had potential going so far as to take new customers to the factory applications for location tracking in indoor settings, floors of previous customers to show their solution the two developed a prototype RTLS that could track in action. objects over a 500 m2 area, which garnered a lot of interest from the commercial sector and became the For their large customers, implementation usually foundation for their company. begins with a proof-of-concept in a small area to demonstrate and validate Sewio technology before In the early stages of development, Sewio’s founders large-scale installation, resulting in a sales cycle of relied on “smart money” investors, including Y Soft approximately 12 to 16 months. For small- or medium- Ventures (a Czech VC firm specializing in IoT startups), scale installations, the sales cycle is usually reduced to help them refine their business model, scale up to three months. the technology, and identify early customers. Shortly after founding, Sewio was approached by Cisco and Today, Sewio has 25 employees with customers in PwC, who were scouting and partnering with startups 37 countries. Its customers include Volkswagen, Budweiser Budvar, Pirelli, and Škoda. 14 For more information on the Czech early stage risk investment activities see: Aridi, Anwar; Gray, Nelson Campbell; Ong Lopez, Anne Beline Chua. 2018. Stimulating Business Angels in the Czech Republic (English). Washington, D.C. : World Bank Group. http://documents. worldbank.org/curated/en/633181541532716870/Stimulating- Business-Angels-in-the-Czech-Republic 23 3.3 Industry 4.0 Adopters: Necessity vs. Experimentation To better understand the customers and markets were identified as the key factors impeding large- that I4.0 startups are trying to access, we also scale transformation. explored the adopters and potential adopters of I4.0 technologies in the Czech Republic, trying to understand what drives I4.0 technology adoption, Adoption strategies and processes identify how and where do adopters find I4.0 solutions, and understand the internal and external Adoption of I4.0 solutions is still sporadic and challenges related to adoption.15 lacks scale for strategic transformation. Adopting and implementing individual I4.0 solutions is usually done on an ad hoc basis. Most Czech companies, Drivers of adoption particularly Czech SMEs, have no formal (or informal) strategies or processes for adopting I4.0 solutions. Czech manufacturers described three primary A few companies with a large-scale presence in the motivations for adopting I4.0 technologies: Czech Republic have launched Industry 4.0 strategies labor substitution, cost reduction, and quality or initiatives, including Skoda Auto, Foxconn, and assurance. Labor substitution through automation Siemens. These typically outline high-level company addresses a critical need for Czech firms, given the goals for digitization and automation and include extremely acute shortage of blue-collar workers in new pilot production facilities that make use of new the country. One manufacturer interviewed for this digital or advanced manufacturing technologies. work stated that “our number one goal in adopting However, these strategies and initiatives do not automation technologies is to replace workers”. include systematic processes for piloting or adopting Labor substitution has the significant added benefit individual I4.0 solutions. of reducing costs; Czech firms believe they need automation, along with other cost-reducing digital Because of the ad hoc nature of I4.0 adoption, the technologies, to remain competitive in the global decision to adopt (or pilot) could come from many market. The need for quality assurance is largely parts of a firm’s management: by executives in an driven by customer requirements and/or the overseas headquarters, in the case of multinational demands of foreign ownership. companies, by local upper-level executives, or by mid-level operations managers who have identified There is very little evidence of value chain or a problem in production. business model transformation in the Czech Republic among existing enterprises, despite the In the Czech Republic, only the big multinational fact that much of the I4.0 literature discusses the companies like Siemens, Skoda Auto, and Foxconn potential for I4.0 technologies to disrupt existing have the resources to develop I4.0 solutions value chains and business models. Some Czech internally. The vast majority of Czech firms look for companies and multi-nationals with manufacturing I4.0 solutions available on the market. Companies plants in the Czech Republic have set ambitious typically approach established incumbents, such goals for automation, digitization, and new digital as Honeywell or Cisco, for “off-the-shelf” products services, but at present most activity is restricted and services – solutions perceived as validated by to pilot scale with no wide-scale reconfiguration or the market and/or with a simple “plug-and-play” transformation at the company level. installation. For more tailored or experimental solutions, Czech companies turn more often to local Interviewed stakeholders largely agreed that startups and universities. As mentioned in Section some I4.0 technologies can enable the disruption/ 3.2, these tailored or experimental solutions require transformations of value chains and business a pilot and testing period to make sure they will not models, but the adopters themselves would need disrupt operations and that they provide the desired to drive these organizational changes. Internal benefits, whereas the “off-the-shelf” solutions to not. company inertia and lack of management capacity 15 Note that the following discussion on I4.0 adopters draws on qualitative interviews with a number of firms, industry associations, and other relevant stakeholders. We did not survey Czech adopters, and thus our analysis may not capture the full landscape of I4.0 adoption in the Czech Republic. 24 Skoda Auto’s Digital Transformation business models, solutions, and products based on digital services. These new products and services include: Skoda Auto’s 2025 Strategy has defined digitization and creating digital mobility services as the •• HoppyGo: peer-to-peer carsharing platform cornerstones of its future corporate development, •• CareDriver: mobility services for children and with ambitions to make the same profits from digital vulnerable older people in the form of trained services as it does from car sales. Skoda plans invest chauffeurs billions of Czech crowns (tens to hundreds of millions of euros) in digitization and automation. •• ŠKODA Connect: online services, such as traffic information, roadside assistance, remote access, As part of the 2025 strategy, Skoda launched the and the Alexa assistant available via Skoda vehicles Skoda Digilab in 2016 to develop and pilot new Figure 20. Enbalers of I4.0 Adoption Change - SMEs management + Large firms capacity Ability to integrate - SMEs into production + Large firms Enablers processes of I4.0 Adoption Data management - SMEs capabilities + Large firms Internal stock of - SMEs digital skills + Large firms Enablers of adoption: new sets of Change management capacity capabilities I4.0 technologies can enable new business models and process changes, but adopters need to A firm’s capacity to innovate depends not only on its have the capacity and willingness to make these internal managerial and technological capabilities, organizational changes. Interviewed startups said but also on external complementary factors and that while some of their technologies could disrupt sources of knowledge (Arnold & Thuriaux, 1997; their customers processes and value chains, the Cirera and Maloney, 2017). This holds true for the customers themselves need to drive this change. ability to adopt I4.0 technologies, which depends These startups mentioned the need for change on the firm’s ability to navigate and leverage a set of management capacity of their customers to internal capacities and constraints and ones that are overcome internal company inertia and drive external to the firm. Consequently, these abilities are organizational changes. Ideally, smaller firms should also correlated with the size of the firm where larger be more agile and able to adapt compared to big and more established enterprises fair better in most, and vertically integrated firms. especially resource-dependent. We identify four key internal capacities needed for effective adoption of I4.0 solutions: 25 Ability to integrate into production processes would need to help their customers build their internal data management capacity before being Manufacturers and other stakeholders continually able to implement their I4.0 solution. Beyond stressed that the adoption of new technologies the implementation of individual I4.0 solutions, cannot disrupt company operations and production – industrial companies may have large amounts of hence the need for piloting new I4.0 solutions. SMEs, data on industrial processes and equipment of great in particular, are largely driven by tight production value to I4.0 solutions providers. Very few, if any, timelines and short planning horizons and rarely industrial companies have formal strategies for when have the time or resources for sourcing and and how they provide access to this data. implementation of I4.0 solutions. One manufacturing SME reported that the company designs its production lines first using “old” technology to begin Internal stock of digital skills production as soon as possible to satisfy customer demands and will then later upgrade using more Potential adopters may need to recruit new digitally automated equipment when time allows because savvy workers with data management and analytics of the longer time requirements needed to set up skills to develop, implement and utilize I4.0 solutions. automated production lines. Depending on the I4.0 solution, they may also need to retrain equipment operators and maintenance crews. Interviewed manufacturers were primarily Data management capabilities concerned with the shortage of blue collar workers, but specifically highlighted the rising competitive Companies need to know what their internal data pressures for digital skills. In such environment, challenges are, and need to be able to collect, clean, SMEs are not able to offer the high market salaries and manage their own data for it to be useful. Several for senior developers and data scientists to compete I4.0 startups explained that this often presented a with large MNEs. challenge when working with new customers. They 3.4 Framework Conditions There are three key framework conditions that The supply of digitally skilled labor can catalyze the creation and diffusion of I4.0 technologies and solutions in the Czech Republic. The most important factor in determining the future These relate to: success of both the supply and growth of I4.0 startups and the diffusion of these solutions among Czech v. The sustainable supply of digitally-skilled labor enterprises is the availability of digitally-skilled labor. vi. The entrepreneurial environment where the I4.0 There is a large body of literature (including Glawe startups and entrepreneurs operate and Wagner 2018, World Bank 2016, Russman et al. vii. The level of awareness and adoption trends of 2015, and others) showing that human capital is a I4.0 technologies in the Czech market, especially critical factor for adoption of I4.0 and other digital among local SMEs technologies. Overall, the Czech Republic is an average performer in terms of general digital skills, ranking 13th in the EU in the DESI Human Capital Generally enhancing these conditions could result Index in 2018, which ranks European member states in more startups and more commercialized I4.0 by internet use and digital skills. The Czech Republic solutions (supply), and more diffusion and adoption ranked 15th in the EU in the number of ICT specialists (demand) among local enterprises and consequently as a percent of total employment and 14th in the further improving economic outcomes. number of STEM graduates per 1,000 population.16 16 European Commission. The Digital Economy and Society Index (DESI). https://ec.europa.eu/digital-single-market/en/desi (Accessed on 5 March 2019) 26 Companies developing I4.0 technologies, including of cybersecurity. AVAST Software had an IPO in both startups and incumbents, generally need 2018 and had the largest market share among anti- workers with advanced digital and technical skills malware application vendors in January 2018,18 in artificial intelligence, data science, automation, while Cognitive Security was acquired by Cisco in or similar fields. While the Czech labor crunch is 2013. most severe for blue collar workers, there are also shortages of workers with advanced technical skills. Entrepreneurship support, in the form of incubators, I4.0 startups have to compete with established accelerators, networks, VCs and other actors, is tech companies, such as Avast, as well as large largely centered in Prague and Brno. Some of these manufacturers, such as Skoda and Siemens, who actors specifically focus on support for Industry 4.0 are attempting to develop their own internal I4.0 startups, such as the I4.0 test beds at the Czech capabilities. IBM has also recently opened the new Technical University of Prague and Brno University of IBM Watson iLab in Prague, which seeks to add Technology, the AI Startup Incubator and Prague IoT 30 new AI researchers over the next few years. Centre in Prague, and Y Soft Ventures, a VC focused Competition for advanced digital skills has driven on Industry 4.0 hardware startups in Brno. up salaries for skilled workers in recent years, adding to the wage burden and investment needs of I4.0 I4.0 startups, like all startups, have a great need for startups. general entrepreneurial and managerial skills. The entrepreneurship culture in the Czech Republic is I4.0 adopters also need technical skills, particularly still developing and these skills are in short supply, in data analytics, data management, networking, as are experienced entrepreneurs and mentors to and programming, to be able to internally develop, help train and spread those skills. Czech university implement and use I4.0 technologies. Technology graduates generally possess good technical skills but adoption is also not a purely technical exercise. less developed soft skills, in particular, managerial, Cirera et al. (2019) identified significant number of sales, and marketing skills. These weaknesses are management skills needed by existing businesses to attributable in part to the rigid curriculum (e.g., facts- absorb industry 4.0 technologies, including business based and with little room for creative thinking that model review and adaptation; developing strategic helps develop the soft skills) found within the Czech partnerships and collaborations; supply chain education system. management; talent management, retention, and training; market and customer analysis; and logistics One potential bottleneck for the Czech Republic’s planning. Sommer (2015) noted that the capacities entrepreneurs and high-growth companies is the needed to meet the challenges of I4.0 adoption county’s nascent risk capital sector. In terms of strongly depend on the enterprise size, and that venture capital investments as a percentage of GDP, SMEs are at higher risk of becoming victims, rather the Czech Republic ranked lowest among its regional than beneficiaries, of the new digital revolution. peers and among the lowest in the European Union in 2016. The Czech Republic also ranks among the lowest in Europe in number of venture-backed Entrepreneurial environment companies in 2016.19 There is an emerging angel investment community in the Czech Republic, but Entrepreneurship, in terms of new business density, it is small both in terms of the number of investors has grown in the Czech Republic in recent years, with and the amount invested and also concentrated nearly four new businesses registered per 1,000 geographically in Prague.20 people in the working age population in 2016. However, despite improvement in new business density, the country remains below the European average of 4.8 new businesses registered.17 There have been several success stories among Czech startups in the last decade, particularly in the area 17 World Bank, “World Development Indicators.” 18 Statista. https://www.statista.com/statistics/271048/market-share- held-by-antivirus-vendors-for-windows-systems/ 19 OECD (2017), Entrepreneurship at a Glance 2017, OECD Publishing, Paris, https://doi.org/10.1787/entrepreneur_aag-2017-en 20 World Bank (2018). Stimulating Business Angels. Retrieved from http://documents.worldbank.org/curated/en/633181541532716870/ Stimulating-Business-Angels-in-the-Czech-Republic 27 I4.0 knowledge flows and I4.0 adoption usually leads to the development or adoption of new trends I4.0 solutions. Large firms are usually more active in such research collaborations and Czech firms are Knowledge barriers related to the range of no exception. Industry 4.0 solutions available on the market and Ecosystem stakeholders reported that I4.0 the benefits they can provide are a challenge for awareness is more widespread now than in previous Czech companies, especially for SMEs. In their scan years, but there is still a need to spread information of the current state of I4.0 adoption in the Czech about I4.0 technologies to many Czech companies Republic, Marek et al (2016) found a highly limited – particularly successful use cases that show the awareness of Industry 4.0, particularly among top process for implementing and using a given I4.0 management of Czech companies, caused by an solution and the benefits provided to adopters. absence of successful business cases and studies that clearly presented successful implementations There are a number of associations and networks of Industry 4.0. In a survey of Czech manufacturers, active in the I4.0 space (particularly industry Basl (2017) found that 60 percent of the surveyed associations, such as the Czech Confederation of companies had never implemented any Industry Industries, Czech Electric and Electrical Association, 4.0 technologies. Of those non-implementing and CzechInno) that primarily focus on lowering companies, 75% said they had little to no awareness knowledge barriers around I4.0 technologies to of Industry 4.0 technologies. Thus, it is important potential adopters, particularly to Czech SMEs. to promote and highlight the productivity and Several of these associations also aim to play a competitiveness benefits of digital solutions among matchmaking role between potential adopters and local companies and SMEs. I4.0 solution providers. Information barriers can be particularly acute The current state of adoption of digital and among SMEs, whose management does not have automation technologies in the Czech Republic the time or resources to seek out information on the is mixed. Czech companies rank very well in the large amount of I4.0 products and services on the use of basic internet technologies for e-commerce, market. Additionally, large I4.0 solution providers ranking 2nd in the EU e-commerce turnover, 3rd usually target and market their solutions among in online sales across borders, and 6th in SMEs large firms rather than smaller and resource-strained conducting online sales. However, Czech companies firms. Research collaborations, R&D, and contract rank much lower in the use of more advanced research, with local and international knowledge digital technologies, ranking 17th in the EU in the providers represents an important source for use of cloud services and 27th in the use of Radio external knowledge and experimentation, which Frequency Identification (RFID).21 Figure 21. Digital Economy and Society Index in 2018 10 8 8 9 8 8 6 8 7 7 8 7 5 7 5 8 6 8 16 16 14 12 13 12 16 16 16 14 15 15 Austria Germany Czech Republic Slovakia Poland Hungary Connectivity Human Capital Use of Internet Integration of Digital Technology Digital Public Services Source: DESI, 2018. 21 European Commission. The Digital Economy and Society Index (DESI). https://ec.europa.eu/digital-single-market/en/desi (Accessed on 5 March 2019) 28 In terms of automation, the robot intensity (industrial automation and digital innovations), with fewer robot stock over manufacturing value added) of the SMEs adopting new product/process innovations Czech economy increased 400 percent between in 2017 than in 2010 – a pattern repeated by SMEs 2005 and 2015, while the OECD average increase around the CEE region, including in Germany, was only 30 percent.22 However, among Czech SMEs, Poland, Slovakia, and Hungary.23 Therefore, SMEs there is stagnation in the adoption of new product around the region seem to be missing out on the and process innovations (which could include both potential benefits of digital adoption. Figure 22. Robot intensity: Industrial robot stock over manufacturing value added, millions USD, current values 0.14 0.13 0.11 0.11 0.06 0.11 0.04 0.03 0.03 0.04 0.01 0.01 Germany Czech Republic Slovakia Hungary Austria Poland 2005 2015 Source: OECD Science, Technology and Industry Scoreboard (2017). 3.5 Public Support for Industry 4.0 in CR The Czech Republic’s Industry 4.0 policies are •• Enhance the ability of Czech companies to be relatively new and still under development. In involved in the global supply chain; August 2016, the Czech government approved •• Promote widespread implementation of Industry the Prumysl 4.0 (Industry 4.0) Initiative, a national 4.0 principles in the Czech manufacturing sector; initiative that aims to prepare and guide the Czech Republic’s efforts to develop and adopt Industry •• Enhance the Industry 4.0 R&D collaborations 4.0 technologies. The initiative has three main between industry, universities, and the Czech objectives: Academy of Sciences. 22 OECD Science, Technology and Industry Scoreboard (2017). https://www.oecd-ilibrary.org/science-and-technology/oecd-science- technology-and-industry-scoreboard-2017_9789264268821-en 23 European Innovation Scoreboard (2018). http://ec.europa.eu/growth/ industry/innovation/facts-figures/scoreboards_en 29 The implementation of the initiative is coordinated grants. 20 instruments are ongoing (of which two by the Czech Ministry of Industry and Trade and started in 2019) and nine are closed. Total budget includes stakeholders from the business, scientific, allocated over the life cycle for these 29 instruments and academic communities. However, this effort stands at CZK 145 billion (approximately USD $6.3 is still in the planning and preparation stages; the billion). Of this budget, 82 percent is funded by the Ministry of Industry and Trade is in the process of EU and the remainder comes from state funding.24 preparing an action plan for implementing the The primary Czech agencies concerned with I4.0 initiative’s recommendations. Thus far, no new are CzechInvest, which dispersed 68 percent of I4.0- budget has been allocated for the implementation related funds from 2013-2017, and the Technology of the initiative. Agency of the Czech Republic (TACR), which dispersed 18 percent of funds.25 Other national strategies include the Innovation Strategy of the Czech Republic 2019–2030, which In terms of objectives, close to one-third of these was approved by the Czech government in February I4.0-related instruments (measured in terms of 2019 and not yet implemented; a national AI disbursed funds) focus on technology adoption Strategy, which is still under review by the Czech and diffusion (i.e., non-R&D innovation), one-fifth government, and Vzdělávání 4.0 (Education 4.0), focus on business R&D, and over one-tenth focus an action plan to reform of the national education on technology transfer and collaboration. Another system to promote needed technical disciplines for one-tenth focuses on skills formation. In terms of Industry 4.0 under preparation by the Ministry of the life cycle stage, the funds are equally disbursed Education, Youth, and Sports. among early-stage startups, scale-up and mature stages. However, only about 10% of funds focus on The key umbrella policy instrument targeting the concept/idea stage. Industry 4.0 is the Operational Program Enterprise and Innovation (OPEI), administered by the Ministry Of the surveyed startups , applied R&D grants were of Industry and Trade with a budget of CZK 120 the most common type of public support received, billion (approximately USD $5.2 billion). Through followed by collaborative R&D grants and support OPEI and a few other programs, there have been for attending conferences, expositions, and other a total of 29 policy instruments related to Industry events abroad. 4.0, all of which are in the form of grants or matching Figure 23. Public support received by surveyed startups Applied R&D projects 52% Collaborative R&D projects 33% Prototyping and demonstration 14% Product design 14% Incubation and office space 24% Entrepreneurship training and/or mentorship 29% Connecting to customers 19% Attending conferences, expositions, or other events 33% Securing loans or investments (guarantees) 5% 24 A similar pattern is detected in other central and eastern European countries. 25 Based on an ongoing analysis by the World Bank of the CR SME Policy Mix. Aridi, A., and Lopez, A., forthcoming. CR SME Diagnosis and Policy Mix Coherence. 30 4. RECOMMENDED POLICY ACTIONS This case study explored the key elements and actors demonstration of their technologies, which they of the I4.0 ecosystem framework related to I4.0 often receive from their initial customers. Lastly, knowledge creation, commercialization and product they face serious uncertainties when it comes to development, and adoption. The analysis sought to availability of risk investments and scaling knowhow understand (i) how the Czech Republic compares due to the infancy of the sector. to the rest of Europe in terms of its I4.0 knowledge base; (ii) how Czech I4.0 startups develop their On the demand side, Czech firms have strong technologies/services, access clients and markets; incentives to adopt I4.0 technologies, including the (iii) and what challenges and uncertainties startups need to substitute labor, reduce costs, and remain face, as well as those faced by potential adopters of competitive in the global market. However, while I4.0 technologies. there have been ambitious announcements related to digitization and automation, I4.0 implementation I4.0 knowledge creation in the Czech Republic, in remains stalled at the pilot scale. Several major terms of publication and patent outputs is modest challenges inhibit more widespread adoption, – below the normalized EU average. However, the particularly among SMEs, including knowledge extent to which startups connect to this knowledge barriers, lack of managerial capacity, production base is unclear because of difficulties related to constraints, and a digital skills gap. spinning out companies and licensing IP from Czech universities and research institutes. In this final section we explore policies and policy support instruments that could help overcome these I4.0 startups face a set of challenges above and challenges and uncertainties. We identify four key beyond those faced by startups in other industries, areas for policy action in Figure 24. including longer sales cycles, driven by the need to pilot and assess their solutions with new customers. It is important to note that most of these policy actions The majority of these startups also require access apply to the general innovation and technology to data and access to technical support and adoption agenda. Nevertheless, some are I4.0 and locations for proof-of-concept, prototyping, and digital specific and address uncertainties faced by I4.0 startups and potential SME adaptors. 31 Figure 24. Recommended Areas for Policy Action Supply of Promotion of the Digital Skills I4.0 agenda Policy Actions I4.0 research Relevance of the and collaboration policy mix performance Promotion of the I4.0 agenda solutions. The SSP challenge-driven platform and its CoFIT event,26 administered by the Czech Problem: SMEs specifically face information barriers Technical University is well positioned to run such that impede their awareness of the potential benefits a national competition. of digitization. Several of the Czech Republic’s industry associations and networks are largely focused on promoting I4.0 adoption, but knowledge Supply of Digital Skills barriers remain. A relatively small subset of Czech Problem: Demand for ICT skills and other advanced SMEs has the capacity to generate/collect or analyze skills is high in the Czech Republic and will only grow their internal data. as more businesses digitize. Developing these skills Approach: will be critical to the country’s capacity to absorb and use I4.0 technologies, and thus, digital skill •• Promote successful business cases of I4.0 development should be central agenda item for adoption among SMEs, showcasing how national level-policies and strategies. specific technologies could generate productivity and competitiveness impacts. The Czech SME Approach: associations and business chambers/associations on the national and regional levels have a leading •• Increase the supply of digital talent and support interdisciplinarity by incorporating role this. digital content into education at all levels. •• Introduce data-focused competitions: University Industry Advisory Boards, which design national-level competitions that could include representatives of local businesses, could help incentivize data-generation and create provide input and advise on the content of these a marketplace for data sharing related to courses to ensure relevance and respond to the manufacturing and industry processes. This enterprises’ needs. could take the shape of a platform where industry participants describe their digital problems and •• Prepare and reskill the Czech workforce with the needed digital skills through training and entrepreneurs/startups and students propose capacity building modules on data science, solutions. The competition would encourage analytics and other digital tools. Such training more SMEs to collect and share data on their activities could be supported by existing policy industrial equipment and system performance, as instrument related to skills development and well as provide testbeds and demonstration sites training. for students and startups to demonstrate their 26 See more info here: https://co.fit.cvut.cz/#info 32 I4.0 Research and Collaboration and knowhow. Finally, the existing tech adoption performance policy mix targeting SMEs is digitally-agnostic and could benefit from better targeting. Problem: The performance of Czech universities and public research institutions is modest in terms of I4.0 Approach:27 knowledge outputs and, most importantly, in the •• Operationalize the approved Prumysl 4.0 commercialization and transfer of this knowledge. (Industry 4.0) Initiative by adopting an action Specifically, technology transfer and knowledge plan and allocating a budget for implementation. collaborations among SMEs and universities Ensure that the implementation of the initiative remains weak due to institutional barriers and a weak complements the existing policy mix and the incentive framework for commercialization. planned strategies such as the Innovation Strategy 2019-30, the AI Strategy, the SME Approach: Strategy and Action Plan, and the Education 4.0 •• Enhance the I4.0 research and collaboration Strategy. Ensure that I4.0-relevant instruments performance and remove knowledge are well articulated in the MIT proposal for the flows’ barriers. Increase focus of applied new OPEI programming period. research grants and other university funding on •• Improve uptake of the PoC and prototyping commercialization outputs ( licenses, contract support mechanisms. Technology development research, spin offs, etc.) not only on IP outputs. services and prototyping instruments can alleviate Improve the incentive framework that allows the pressures off startups to demonstrate the researchers and students to spin out companies. viability and results of their solutions. Improve the Encourage universities to pursue research reach of these instruments through partnerships collaborations and contract research with and with intermediaries and universities’ technology for industry by addressing informational and IP- transfer offices. Extend the qualifying criteria related barriers. for technology development support to go •• Improve the performance of existing beyond technical proof of concept to include technology transfer offices and non-academic commercialization and piloting of projects. intermediaries active in supporting research •• Support intermediaries that connect SMEs commercialization and the acceleration of with digital solution providers: this could digital startups. There is a particular need for be implemented through supply chain finance organizations that can provide basic business instruments to link up potential adopters with services for I4.0 university spinouts and startups. local I4.0 startups or SME solution providers. Local and regional authorities have a crucial role in supporting and partnering with such •• Develop and professionalize the early-stage intermediaries. risk finance market: A recent analysis by the WB of the business angel market recommended several policy actions that are still relevant to Relevance of the Policy Mix to the I4.0 risk finance market.28 This includes the I4.0-specific challenges professionalization of early stage investment activities though the establishment of a Czech Problem: Most startups surveyed required support Angel Association and improving the investors’ for PoC, prototyping, or demonstrating their readiness and knowhow through I4.0-specific technologies, and largely received it from their early knowledge exchanges. customers. Despite the availability of a number of active Centers of Excellence and university test-beds, •• Experiment with I4.0 and digital-specific vouchers and matching grants for SMEs: utilization of these facilities has been low. It is evident Introduce I4.0 and digital-specific vouchers and that there is need for public support, especially at matching grants to enable SMEs to buy I4.0 and the early stage of I4.0 technology development digital solutions and alleviate the cost burden of and demonstration. The market for early stage risk technology purchases and upgrades. finance is still under developed lacking experience 27 Majority of the actions suggested here relate to the existing instruments under the Operational Program Enterprise and Innovation (OPEI) and the Technology Agency CR (TACR) 28 World Bank (2018). Stimulating Business Angels in the Czech Republic. Retrieved from http://documents.worldbank.org/curated/ en/633181541532716870/Stimulating-Business-Angels-in-the-Czech- Republic 33 APPENDIX I. METHODOLOGY This report follows a case study approach to describe full list of persons interviewed. Additionally, survey the experiences and lifecycles of Industry 4.0 of 54 I4.0 startups was also conducted, with 21 startups in the Czech Republic. The analytical bases responding. I4.0 startups were identified through for this report were a literature review; an analysis of interviews with local I4.0 industry experts and publications, research projects, and patents related investors. The survey was administered online from to I4.0 in the Czech Republic; qualitative interviews April 1 – May 3, 2019. with key stakeholders; and a survey of Czech I4.0 startups. Interviewed Stakeholders Information about Czech research projects were drawn from the Czech Technology Agency’s Startup Founders and CEOs STARFOS database, a full-text search engine which contains data on all research and development •• Tomas Borovicka, Datamole projects performed in the Czech Republic with •• Patrik Juránek, Virtuoso 3D state financial contribution and all contract research •• Vojtech Kaldec, unnamed early-stage startup performed by public institutions. Publications were •• Pavel Konečný, Neuron Soundware drawn from Web of Science, and patents were •• Vojta Rocek, Stories.BI drawn from the Orbit Intelligence Questel Database. Research projects, publications, and patents related •• Jan Sedevy, Alquist to I4.0 were identified using keyword searches using •• Milan Simek, Sewio nine keywords (Industry 4.0, Internet of Things, •• Ondrej Vanek, Blindspot Solutions Artificial Intelligence, Machine Learning, Big Data •• Roman Zaks, Aimtec Analytics, Cloud Computing, Robotics, 3D Printing) drawn from the World Bank’s Europe 4.0 framework. Manufacturers The network analyses were conducted by Unico AI •• Tomas Sedlacek, Kovona and Unico Analytics using the Cytoscape software •• Petr Hofman, Skoda Auto tool. The network visualizations were created using the tool’s “organic layout”. The Cytoscape Ecosystem Stakeholders visualization algorithm pushed nodes with more connections to the center of the visual, while nodes •• Patrik Juránek, Startup Grind Prague with a smaller number of interconnected neighbors •• Adam Kocik, J&T Ventures are pushed to the periphery. •• Jaroslav Liskovec, National Centre for Industry 4.0 18 qualitative interviews were conducted with •• Vaclav Pavlecka, Air Ventures public and private stakeholders from the Czech I4.0 ecosystem, including with founders and CEOs of •• Jan Proks, Czech Electronic and Electrical I4.0 startups; manufacturers; as well as actors from Association industry associations, entrepreneurship support, and •• Tereza Samanova, CzechInno risk capital organizations. Section below includes a •• Milos Sochor, Y Soft Ventures 34 REFERENCES Autor, D., & Salomons, A. (2018). Is Automation Labor Share-Displacing? Productivity Growth, Employment, and the Labor Share. Brookings Papers on Economic Activity, 2018(1), 1-87. 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