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Suggested Strategies for U.S.-EC Cooperation and Competition MR. HOWARD: We have saved the best for last. Thus far we have heard a description of where the science and technology policies of the European market are headed; the views and concerns of the U.S. science community; access to precompetitive programs in the European Commu- nity; and standards and the strategic implications today. Our last session is going to answer all the questions that arose in previous sessions. Our first speaker is Michel Carpentier, who is the director general of DO-XIII, the directorate general that covers telecommunications, information industries, and information. He began his career in government after a brief private service at the Commissariat a l'Energie Atomique. He worked in the nuclear industry both in France and within EURATOM. He has held a variety of positions in the European Community in both the nuclear and environmental areas. In his present position he has been heavily involved in the creation of a number of programs that have been discussed in the last day and a half, specifically the ESPRIT program and RACE and others in the telecommunications area, generally in the area of policy and action programs concerning telecommunications, information industry services, and standardization in these sectors. Mr. CARPENTIER: We have, as Vice President Pandolfi indicated in his opening address, looked into the conjunction of several important and exciting developments that concern Europe. It has been said repeatedly that the EC is nearing the conclusion of a largely integrated market that will allow the free movement of people, goods, money, and services. What has not been said as often is that the Single Act also gives the EC the means to ensure the economic and the social cohesion of all member states, including the less privileged; to take environmental and training issues into account; and to start negotiating the creation of a European economic and monetary 126

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STRATEGIES FOR U.S.-EC COOPERATION AND COMPETITION 127 union. I say this because Mr. Barker mentioned that there were a few topics that may have not been underlined enough. At the same time, the world is faced with very fast-moving events in central and eastern Europe, where the restoration of both democracy and a market economy will undoubtedly have an impact on all of these issues in the future. What consequence is this conjunction of events going to have for R&D transatlantic cooperation, at a time when science and technology are becoming more and more important in shaping the industry of tomorrow and its ability to compete in the world market? How can we make the best of the changes that are occurring and that will occur? We have heard many answers to these questions, ranging from concerns to more optimistic analyses, from pressure to cooperation. From the recent statements and initiatives of President Bush, and from the discussions we had with various departments and establishments over the past few days, we know for sure that the importance of the role of science and technology is fully recognized in this country. On the EC side, the inclusion in the Single Act of one chapter devoted to R&D as well as the expected early approval of the next five-year R&D Framework Program provide the EC with the legal basis and the financial means to launch or consolidate cooperative R&D programs. European governments, universities, and industries are also engaged unilaterally or collectively in cooperative R&D programs. For this closing session, the panel has been asked to make suggestions on how the United States and Europe could use the opportunities that are open- ing up to cooperate in the R&D fields, reconciling cooperation with compe- tition. Although competition and cooperation may at first glance seem mu- tually exclusive, I do think that each of these concepts is a prerequisite for the existence and realization of fair competition, on the one hand, an balanced cooperation on the other. There must be, therefore, a fair and delicate balance between competition and cooperation to cope with the interests of the various actors concerning R&D and there are many, namely public authorities, governments and parliaments, economic actors, scientists, and also taxpayers. This balance, and the part in the decisions taken by these different actors, must be found within each country or group of countries, such as the EC. It must also be found at the international level. It may be of interest to quickly examine how the EC has proceeded to reconcile R&D cooperation with industrial competition, in order to consider to what extent one can draw upon this experience to improve U.S.-EC R&D cooperation and competition. First, EC R&D cooperative programs are focused on basic research and on precompetitive and prenormative R&D, as opposed to competitive indus- trial development whose funding must originate from industry alone.

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128 EUROPE 1992 Second, the EC is involved in R&D sectors where the European dimen- sion appears to be useful or necessary. This is referred to as the so-called subsidiarily principle. The selected sectors are, for example, those where economies of scale are needed or those that are by nature of common interest for member states, for example, environmental research or skill improvement schemes. Third, where industry is involved, one should never forget that it is requested to bring a large proportion of matching funds. Fourth, the intellectual property rights' conditions are prenegotiated, in order to find, before any contract signature, an appropriate balance of inter- est, including the background and the foreground information dissemination regime. Fifth, the return for the countries and companies involved is not calculated in a narrow sense but on a global basis, including advantages of varied nature: improved knowledge, participation in centers of excellence networks, financial return. Financial return is one aspect; it may not be the most important. Sixth, there is no relation whatsoever between trade problems and R&D cooperation. Seventh, both member states' administrations and industry are tightly associated with the implementation of the programs, through different types of joint committees. Moreover, and I think this was said yesterday by my friend, Paolo Fasella, the Commission does strictly apply the competition rules provided in the Treaty of Rome on abuse of dominant position and on public aid. These may be conditions that, mutatis mutandis, might be applied to U.S.-EC R&D cooperation. Turning to these relations as they stand now, one must first state that there already exists an impressive record of cooperation bilaterally with the member states, with the European Community in the nuclear and environmental areas embodied in the Framework Program, with other European organizations such as ESA in space research. We are certainly aware of the European commitment to cooperate with the National Aeronautics and Space Admin- istration in Space Station Freedom. European efforts in this domain will amount to about $3 billion. Besides this already impressive list of cooperative initiatives, I strongly believe that as arrangements for the Single Market in Europe are completed, making this market more open, more integrated, and more transparent, the balance of new developments having a positive impact on science and technology will serve to strengthen transatlantic cooperation. Naturally, there will be changes, and adaptation to a changing situation always requires efforts; this will require efforts from both sides of the Atlantic. We have carefully listened to your concerns, and we must take them into consideration. Let me, in turn, recall a few of our concerns. I will focus on three of them.

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STRATEGIES FOR U.S. -EC COOPERATION AND COMPETITION 129 The first one relates to the reciprocity and retaliation concepts used by U.S. authorities in sectorial and bilateral trade negotiations, as opposed to the more positive concept of mutual access to opportunities negotiated through multilateral agreements on a multisectorial basis, which EC favors. We feel that continuing to put the EC on the priority list of the Telecommunications Trade Act can hardly contribute to creating the atmosphere of mutual confidence necessary to embark on a most desirable transatlantic cooperation in the field of telecommunications. A second concern, but it seems that it is going to be relieved, relates to intellectual property.rights and to export control rules on technologies and technology-based products. The third concern relates to the fact that on balance European firms have less access to the U.S. R&D bases, which we feel have become more restricted in recent years as defense outlays for R&D have grown. In the ESPRIT II program for instance, more than a dozen American EC- based firms are involved in 25 projects, which represent 16 percent in number and 17 percent in value of the total program. It has been said already that the R&D EC money going to EC-based U.S. firms is now as high as 1.5 to 2 percent, compared with only 0.18 percent of U.S. publicly funded R&D going to U.S.-based EC organizations. Both figures naturally are small, too small, in absolute terms, but the proportions are clearly asymmetrical. Moreover, EC firms are excluded from SEMATECH, VHSIC, and SBIR, and they participate in a very limited way in industrial cooperative U.S. programs such as RPI, MCC, and so on. I would like to stress, however, that for us these obstacles do not make cooperation any less desirable. Of course, it provides a challenge for our industries and universities as well as for yours to find the common ground, the right topics, and the right occasions. I am very optimistic on that score. We are opening up our markets and extending the possibilities of cooperation. At the same time, it was with great satisfaction that we learned about significant progress and an expression of willingness by the United States to streamline the COCOM list. Within a framework of gradually retreating obstacles, how can our coop- eration grow and at the same time enhance fair competition? Starting with fair competition in high technology, we have heard the role played by stan- dardization. It has been explained to you that the European process will eventually be a single one and that legislative actions will be restricted to the essential requirements. Compared to the current situation of a multitude of national standards and sometimes very detailed legislative provisions, there can be no doubt that the new situation will be much easier for companies outside the EC to work with. I am not only talking about the results of the process that you will be confronted with. I am sure that once everyone is accustomed to it a single process will also be found much easier regarding

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130 EUROPE 1992 opportunities for comment or actual technical contributions in an earlier stage. Of course, things would go even smoother, as has been said many times here, if the United States in its domestic standardization process would give preference to the adoption of implementation of international standards to the same degree as we do. Our approaches to standards are not yet the same, and differences do still arise, but we can also come closer by attacking our future differences at their root at the level of prenormative research. Jean-Pierre Contzen gave some examples earlier. Collaboration in prenormative research can bring us closer to planning in advance for the same standard rather than each trying to impose our own. There are many areas for cooperation in prenormative research, from software for computer-integrated manufacturing to office document architectures; from testing tools for speech recognition systems to tools for electronic verification; and from CAD framework standards to home systems, whose economic importance is growing rapidly. A good example of prenormative research can be found in the area where we are investing many researcher-years in rationalizing the communication taking place between the different production processes. CIMOSA and CNMA are typical examples. Another interesting example is the area of speech recognition. U.S. research in this area is more oriented toward recognizing different accents of the English language, whereas European research is more oriented to recognizing the accents of different European languages. Prenormative re- search can result in standards for testing systems that will accommodate both approaches. Besides cooperation in standards, there are also technology areas in which the exploitation of combined efforts can bear significant results. What we call HDTV or what you call high-resolution image systems, is one such area. Semiconductors are another. As you know from our activities in the field of HDTV, the Community considers, as you do, the creation of a compatible high-quality image system to be of great importance economically as well as culturally. In a very successful European cooperative project, our industry has come up with a fully qualified technical solution, including HDTV production standards. It seems to me that without going into detail there is ample scope for identifying possibilities of cooperation in this area. In a similar vein it has been recognized for several years that semicon- ductors are a key element in the whole of the modern economy. Two years ago relations between the United States and Europe were quite difficult in this sector, but the situation has now improved significantly. In the first place, there is a growing recognition that it is essential for the major industrialized regions to have access to competitive and alternative sources of supply of the key technologies. Second, policies aimed exclusively at complete domestic

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STRATEGIES FOR U.S. -EC COOPERATION AND COMPETITION 131 self-sufficiency are going to fail, both economically and politically, given the global characteristics of high-technology markets and the need for com- petition. Consequently, there will have to be a degree of cooperation. It will not be exclusive really in one direction or another, but it does seem to us in the Community that there is currently a window of opportunity to raise cooperation between the United States and Europe in the area of semiconductors to a rather higher plane. The agreements between companies such as Siemens and IBM for the development of 64-megabyte DRAMs show that such co- operations make sense and can produce mutual benefits. I am sure we can find the topics on which both sides can make complementary contributions and where the exchange of expertise involved in the coopera- tion is not conditioned other than by the legitimate property interests of those providing the contribution. In fact, some topics have already been explored tentatively between both sides. Vice President Pandolfi mentioned in his opening address five domains of potential cooperation. I will therefore limit myself to a very short round of elaborating on basic research and information technology. This is an area where transatlantic cooperation has a long tradition and where progress will still hold the key for major future breakthroughs. Again, there are many areas for cooperation, and the following are but three examples. There are important issues to be resolved in the field of computer vision and even more important ones in integrating the knowledge acquired from that research into the applied realities of robotics. A lot can be gained also through cooperation in the foundations of software tools that deal with concurrence, parallelism, and distributed systems generally. These are dif- ficult areas, and unification of the conflicting backgrounds and solution of the problems in them can have long-term implications in the marketplace. Neurocomputing, according to many, holds enormous promise for the future. It is recognized, however, that unless a lot more research goes into the foundations of this new technology the current industrial experiments will be disappointing and may deprive us of real progress for some time to come. Considerable benefits can result from cooperation in a challenging area where resources are particularly scarce. Cooperation between well-recognized teams in the United States and the EC could bring together the best and the brightest in the world in an effort to cross the present thresholds. I think that on both sides we would like to encourage the dialogue for cooperation in basic research, which, if it focuses on the areas where balanced benefits can be achieved by optimizing our use of scarce human resources, will find our joint and full support. Cooperation has met with problems in the past, and some of these prob- lems have inevitably been reflected in my remarks. But we are all subject to the discipline of membership in the global system, and finding solutions

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32 EUROPE 1992 to problems is what cooperation is all about. On the whole, the opportuni- ties that present themselves far exceed, in my view, the problems that have to be overcome, and the will to overcome them is there. If consistency is pursued and the support for competitiveness does not impede the success of cooperation, more cross-border technological and scientific alliances will emerge. That brings me to the end of my statement about cooperation. You have noticed, of course, that I have avoided a too-precise choice of subjects and approaches. One thing seems clear to me. If one wants to proceed rapidly, any agreement to be concluded will have to be fairly specific about the topics to be treated and will have to deal with the aspects of property rights, exploitation, etc., on a case-by-case basis. What is, of course, of paramount importance is that in these specific cases where cooperation is deemed ad- vantageous by both sides, all obstacles to the flow of knowledge and reserves are removed. Once the desirability of cooperative work in a certain area has been established by identifying our mutual interest, workshops of experts can be set up on both sides of the Atlantic to identify or even to set up the teams that can start cooperation and to elaborate on the methods of cooperation most suitable for each area. I should like to thank the organizers for the opportunity to give our views on developments toward the European integrated market and the prospects for cooperation and competition. Throughout the years the Community has become better equipped to face these challenges. This has no doubt contributed to the interest of others to cooperate with us. I wish to point out in closing that there is a wider implication. The political and economic presence of the European Community as a whole acts as a stabilizing factor, especially with the current situation in the eastern European countries. Balanced, mutually beneficial cooperation with the United States will reinforce this stability and help with peaceful transi- tion to democracy in those countries. That seems to me an additional incentive to continue and actively explore all possible forms of cooperation. MR. HOWARD: We move on now to our second speaker. Dr. Hans Van Doesburg is a vice president with Booz, Allen and Hamilton, based in the firm's headquarters in The Hague. His management consulting expertise and experience over the past 10 years have concentrated on business strategy and technology management issues, primarily for companies in the energy industries and chemical and pharmaceutical industries; he refers to these as the molecular industries. His clients are in industry, government, and various European countries as well as the United States. Prior to starting his consulting career, he had a career with Shell Oil and has a series of degrees in chemi- cat engineering. DR. VAN DOESBURG: I would like to step away from the main theme of today, which has largely been policy-related issues and standardization.

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STRATEGIES FOR U.S. -EC COOPERATION AND COMPETITION 133 I would like to bring somewhat more of a businessman's perspective into the discussion, to try to address a couple of questions such as what really are the strategic implications for companies that want to compete in Europe as part of the global competition. I would also like to address the question of what competitive restructuring in Europe and around the world really means for actually managing research and development resources. I think this is a somewhat different theme and brings in the corporate and company management perspective. I think it is certainly interesting for those of you who are from corporations; for those of you who are not, it is interesting to get a sense of the other aspects that government or policymakers should worry about, to try to facilitate companies who want to compete in Europe and help them actually do that. I would like to break Europe 1992 into three different phases. One could look at this event as kind of a sound barrier, called 1992. I certainly do not want to see it as a discrete event; it is something that stimulates a lot of change, but it is certainly not a major cause of the change that we are seeing at the moment. The first phase is regulatory harmonization. This has been addressed to quite an extent already today; it is certainly the area of harmonization that has progressed quite well. The areas I would like to spend more time on are industry restructuring and resource reallocation. Industry restructuring is already occurring in and around Europe. At the moment, to a very large extent, it means mainly a change of ownership of companies. There has certainly been a wave of mergers and acquisitions within the EC, and companies from outside the Community are trying to buy companies in the EC. What follows after a lot of companies have been bought and sold and that is the essence of the restructuringis a phase that I call resource reallocation. Then the corporate manager owning a lot of companies in many countries needs to somehow try to manage that group of companies in a way that ultimately uses the resources throughout Europe or the world in an optimal way. I want to leave you with the message that the industrial restructuring going on is absolutely not the result of the harmonization of 1992. Certainly there are things that are being triggered by the harmonization, but by and large a lot of the changes are driven more by the need to compete on a global basis in a number of industries. I think that means that Europe is not only a battleground for European companies to try to compete with each other. Europe is one of the three major markets in the world where European, U.S., and Japanese companies are competing with each other as part of a global game. To think about what drives restructuring, we should look at the effects of deregulation. A lot of European companies have been protected within their national borders. Because of protectionism, there really was no need

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134 EUROPE 1992 to compete internationally. To look for growth many of those companies have diversified in their home markets, in Germany, France, or Belgium, or wherever. That has led to a scale that is actually not quite optimal to get the right level of production costs, particularly in those industries where scale really counts. It is very clear that a company that has Holland as its home market does not have the advantage in terms of tapping economies of scale as a company doing business in, say, Germany does. What is actually happening with harmonization is that this vicious circle is being broken by doing one very simple thing removing the "no" in "no need to compete internationally." That brings us to a totally different situ- ation, where companies now really have to compete internationally. As a result, companies are focusing much more on core businesses, and they try to grow these at an international level. There is also a process I call dediversification. Before, companies diversified to achieve growth in other businesses within their home country. It is fair to say now that many companies are spinning off businesses that they no longer consider part of their core business. They really focus on core businesses across many different countries, trying to seek the scale economies they need to compete in global markets. That brings us to a more competitive industrial structure for most companies throughout Europe, which in turn brings more desire for deregulation. I think the 1992 process and the more international attitude within Europe certainly stimulate the drive to compete internationally. This stimulates some of the industrial restructuring, but certainly not all of it. We have already seen quite a bit of restructuring, but we have not seen the end of it yet. Figure 4 shows a number of industries; two of them are technology intensive, but the argument applies just as well to other industries. It shows the concentration levels of the industries in a number of countries, giving the market share of the top five companies in each country in the various industries. What it indicates is that in passenger cars the concentration level in most European countries is very high. You could conclude that we have therefore achieved economies of scale that make us competitive, but I think that would be the wrong interpretation. The right-hand side shows the 1992 scenario. If you take the economic borders away and make a very simple calculation of the market share of the top five competitors in Europe, you see that the concentration levels are quite a bit less. Well, so what? I think that is a fair question. Consider this: We are now competing at a European scale, but to really be competitive at a world level companies will probably have to become even bigger. Therefore, there will be a lot more consolidation and concentration in most of these industry sectors. As a means of comparison, we have added the top five competitors in Japan and the United States in similar industries to the chart (Figure 5~. You see that the automotive sector and also the other two sectors in Japan

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STRATEGIES FOR U.S. -EC COOPERATION AND COMPETITION Europe Today 135 The 1992 Scenario ~ _ Passenger cars ~ UK ( Life I nsurance ~ Pharmaceuticals EEC D It UK EEC UK EEC FIGURE 4 Industry Concentration Levels in Three Industrial Sectors: Market Share of the Top Five Competitors in the EC (D = Denmark, F = France, It = Italy, UK = United Kingdom). and the United States have much higher concentration levels. From that it can be concluded that those companies are probably better positioned to compete in the world scale, at least in the industries where scale counts and where world markets are needed to be competitive. Analyzing this for many industry sectors, you see a similar picture. I think the restructuring, the consolidation, of industries in Europe is by no means at an end. What we have seen so far is just a start. If industries really want to become competitive, a lot more consolidation will happen over the next several years. Even in an industry such as pharmaceuticals, which is one of the more fragmented industries, European companies are by no means large enough to compete on a global scale. Some of the moves of major pharmaceutical companies in the past year are a reflection of this situation. Not only are European companies consolidating and becoming more powerful competitors in Europe, but there is a whole new category of competitors becoming extremely powerful; these competitions are a variety of Japanese companies coming to Europe at a very rapid rate. There are large numbers of Japanese businesses based in Europe, and most of these locations have

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136 EUROPE 1992 Europe Today The 1992 Scenario ( Passenger cars) - Life Insurance ~ (Pharmaceuticals) D F It UK EEC US J D F It UK EEC 1 __ D F It UK EEC US J FIGURE 5 Industry Concentration Levels in Three Industrial Sectors: Market Share of the Top Five Competitors in the EC, United States, and Japan (D = Denmark, F = France, It = Italy, UK = United Kingdom). been set up in the past five to eight years. In the model for the European competitive arena, this is a major component: Not only will the much more powerful and larger European companies be more forceful in competing with U.S. companies doing business there, but there are also a fair number of very powerful Japanese companies that have come into the picture. Companies will have to change; they will have to become more interna- tional or global in their R&D orientation to support their international position in doing business. We can compare leading companies in Japan, the United States, and Europe to try to understand how international they are at the moment. What you see is interesting: Japanese companies, despite their world success, are actually not yet very internationally oriented when it comes to doing a significant portion of R&D outside Japan. This is changing rapidly, however. There are major changes going on in the automotive industry, in the direction of the United States and Europe, where Japanese companies are becoming much more active in doing R&D overseas. European companies have usually been much more international in their operations. Certainly, the amount of R&D they do outside their home continent has been impressive. Among U.S. companies, there is quite a range. There are companies that hardly do any R&D outside the United States and work mainly on an export basis; there are also a fair number of companies that have kept their international research presence reasonably

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142 EUROPE 1992 in 15 countries, six regional technology centers, around 7,000 employees, and more than $1 billion in annual revenues. We have experienced local managers in all our European locations, and they are a significant resource to us as we move into the post-1992 era, continuing to execute the essential transitions in our global and local networking of organizations. Our operations began in Europe with semiconductors. Today that is about 60 percent of our total revenue. In addition, we have industrial automation and control systems, business computer systems, consumer electronics products, defense electronics, metallurgical materials, and electrical control products in Europe. All of our worldwide operations are connected with real-time communi- cation networks, and if we use this properly it is a key asset in this time-based competitive need we have for the future. We intend to bring this capability to our customers in Europe at the point of use, in whatever village the customer is located in, and try to leverage our worldwide capability to do this. In summary, I think the task at hand for all parties in the process of a European integration is to take full advantage of the opportunities we have heard about. They are going to continue to evolve for the next several years, and firm positions must be taken to meet the challenges because they certainly will appear also. There are a few points that I might offer to consider. First, the European Commission must ensure that guidelines on such issues as local content, product standards, rules of origin, competition policy, and procurement are written and enforced in a manner that is nondiscriminatory to U.S. companies and others doing business in Europe. Second, the U.S. government must counter unfair foreign trade practices and ensure improved access to worldwide markets through aggressive en- forcement of U.S. trade laws. This is the best recipe for avoiding enactment of protectionist legislation. The U.S. government must also be prepared to work closely with the European Commission on safeguarding things such as intellectual property rights and on bringing the present round of GATT negotiations to a successful conclusion. Third, European electronics companies will continue to consolidate and merge operations as necessary to get scale, to get technology leadership positions, to take advantage of shared investments and common standards, and so forth. Still, European companies will be looking outside Europe to acquire some of the technological, manufacturing, and marketing expertise that will be required to compete in the international marketplace. This will obviously be a move when you look at the market shares I mentioned earlier. Finally, U.S. electronics companies must develop European strategies that allow increased emphasis on the localization of marketing and flexible production to accommodate customer demands. The European push to achieve technological parity with the United States and the Asia/Pacific region means that U.S. firms competing in Europe can afford nothing less than state-of- the-art technology and R&D, coupled with top-class customer support.

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STRATEGIES FOR U.S.-EC COOPERATION AND COMPETITION 143 We at Texas Instruments consider ourselves to be a global company and an operator in the worldwide free enterprise system as well as a good European citizen. The recent watershed events in eastern Europe have demonstrated that the desire for free markets will eventually overwhelm those who seek to curtail them. The best competition policy we can request is equal access to all markets and the opportunity to compete fairly for all business, government or commercial. With this policy we can continue to contribute to the development of world-class technologies across Europe and around the world. MR. HOWARD: We have now heard from a representative of a large established company in Europe in an industry that at one time was a newcomer but is now beginning to mature in its worldwide and global respects. We will now hear from Jim Wavle, who is with a new company in a new industry the integrated biopharmaceuticals industry. Jim is president and chief operating officer of Centocor. He comes to this technical responsibility with a background as an attorney, working his way up through Warner- Lambert in the law department. He broke out of the law department, becoming senior vice president of Warner-Lambert and then president of Parke Davis, Warner-Lambert's pharmaceutical division. He oversaw major expansion activities within Parke Davis, including new research facilities in the United States and Europe. He joined Centocor as president and chief operating officer in November 1987 and is working on building this new company into a major biopharmaceuticals firm. DR. WAVLE: Thank you. In preparing my remarks it was suggested that I consider the issue of cooperation and competition in Europe, 1992, from the unique perspective of my own particular company, Centocor. Unlike most of the corporations represented here, Centocor is not as yet a household word. In addition, the challenges faced by the highly regulated biotechnology and pharmaceuticals industries in which Centocor participates are somewhat different from those associated with semiconductors, telecommunications, or various heavy industries. Therefore, it seems essential that I preface my comments by sharing with you a little background about who we are and what we do. Monoclonal antibodies were first produced in 1975, an achievement that subsequently earned a Nobel prize for Kohler and Milstein. Four years later, in 1979, Centocor was founded for the explicit purpose of utilizing this powerful new technology to create novel health care products targeted at unmet medical needs. To us it is axiomatic that the pursuit of a new technology with substantial commercial potential must be conducted on a global basis, in order to maximize the chances of receiving an adequate return on the research investment. Europe and America are of equal and paramount importance to global success, whether in research or in the commercialization process, and the significance of Japan is now apparent to all. This global perspective is particularly critical for any company that wishes

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44 EUROPE 1992 to participate in the highly fragmented pharmaceuticals industry, where many large, well-financed, multinational players aggressively compete across a wide spectrum of research while strong national firms often hold predominant positions in local markets. By the end of the 1980s, more than 1,000 new biotechnology companies had been established, and the vast majority had deliberately chosen to place themselves at the service of the pharmaceutical giants to act, in effect, as contract research houses. We have taken the opposite approach. We seek to compete with the biggest companies in the industry by establishing an independent, fully integrated biopharmaceuticals company with our own research, manufacturing, and sales organizations in Europe and the United States. We are convinced that we can successfully challenge the large drug com- panies provided we do two things very well. First, we must remain tightly focused on our specific technology and, second, we must maintain a keen awareness of the key factors for success in the pharmaceuticals industry. Thus, Centocor is a technology-driven rather than a market-driven company. Our goal is to establish a preeminent position in monoclonal antibody technology by placing ourselves at the forefront in the creation of tangible products from every important scientific advance in this field. Large pharmaceutical companies often begin a drug development effort by selecting a disease category and then choosing from the gamut of potentially applicable tech- nologies. We, in contrast, start with monoclonal antibody technology and then pick the disease targets this technology can most effectively address. This approach allows us many synergies, and yet it does not restrict our ability to have a potentially major impact on public health. We have a wide range of antibodies with utility in diseases for which current therapies are inadequate, including cardiovascular, autoimmune, inflammatory, and in- fectious diseases. Because our objective is to build an independent phar- maceuticals company, we study the strengths of the industry leaders in every facet of the business, and we look for competitive advantage wherever we can discern weakness, whether in product opportunities or in industry structure. These analyses are essential to strategy formulation for key areas such as basic research, product and process development, clinical development, regulatory affairs, manufacturing, marketing, sales, and finance. In our view, management is of crucial importance in all of these endeavors. Our management team is highly experienced in every aspect of the pharma- ceuticals industry, with veterans of most of the multinational pharmaceutical companies, whether American or European. At least 15 nationalities are represented among our senior managers in the United States and perhaps a dozen in Europe. Nearly half of the members of our board of directors and senior management team are Europeans. The vast majority of our senior management team has extensive international business experience. We be- lieve this experience is critical to success in the global marketplace and to

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STRATEGIES FOR U.S.-EC COOPERATION AND COMPETITION 145 the formulation of global strategies addressing every key success factor for the pharmaceuticals industry. In terms of basic research, our strategy is rather straightforward, whether in Europe or in the United States: Cooperate with academia and compete with industry. In biotechnology, research is conducted on a global basis. We maintain an extensive network of collaborations with academia, the source from which so many of the advances first emerged. In fact, Centocor has arrangements with researchers at more than 50 different institutions. We strive to work with the world's leaders in every field of antibody research; thus, not surprisingly, we have dozens of collaborators in Europe. To date, our research efforts have not been significantly encumbered by government research policies in either Europe or the United States. It is essential that the research environment remain open if we wish to allow people to benefit from the latest advances in biotechnology. In this regard we hope the EC will not see fit to condone or expand upon the policies of some member states, which have sought to favor local research by allowing more generous price reimbursement for those pharmaceutical companies that conduct research within their national borders. Such policies clearly have the potential to distort research and could be prejudicial to small, young, research-intensive companies such as ours. If government is to enhance the research process, it is essential that strong patent protection be expeditiously provided to inventors. We believe that the so-called patent restoration efforts in Europe, as in the United States, are appropriate and necessary for pharmaceutical products. Govern- ments need to reward inventors who develop new pharmaceuticals that both enhance the quality of health care and address the concerns of public and private payers who wish to improve the cost-effectiveness of the health care systems in the United States and Europe. We believe that the European patent office is working very effectively and that patent offices on both sides of the ocean are performing in an evenhanded manner without national bias. Our hope would be that the U.S. government might follow Europe's lead and provide our patent office with the resources necessary to expeditiously handle the burgeoning load of bio- technology cases. Clinical development, like basic research, cannot be limited by national borders. One of the key factors for success in the pharmaceuticals industry is the ability to conduct well-designed and well-controlled clinical trials. This is crucial in the development of antibody pharmaceuticals because in vitro studies and animal models have proven to be of limited utility in assessing the activity of antibodies. Thus, often, meaningful data can only be gathered in humans. Our collaborators in Europe and the United States have been of enormous assistance to us in rapidly exploring the clinical activity of new antibodies.

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146 EUROPE 1992 Our research and clinical development activities have been greatly as- sisted by the very high level of scientific knowledge within both the FDA'S center for biologics and the regulatory agencies of the EC member states. The regulatory standards are likewise uniformly high. Importantly, we have not detected significant favoritism or national bias in any of these agencies. We trust this will always remain so and are unaware of any proposals that would make us doubt that this would be the case. In regard to regulatory policy, our most fervent wish would be that the administration and the Congress might come to recognize the urgent need to provide the FDA with a very substantial increase in the resources needed to carry out its broad mandate to promote and protect public health. In Europe, Centocor is the beneficiary of an enlightened regulatory environment. All of our products are biopharmaceuticals and thus are governed by the new high-technology concentration procedure. The 12-nation CPMP and its biotech working party are working very effectively. The CPMP has established comprehensive guidelines for biotechnology products such as ours, and its members are driving themselves hard to ensure that marketing approval applications are reviewed expeditiously. Thus, Centocor is fortunate to have its European destiny governed by one of the most forward-thinking multinational groups to have emerged within the EC. While we do very deliberately praise the high-technology concentration procedure with respect to the CPMP review process, the time taken by some member states to issue the national licenses required for marketing has been disappointing. In this regard we view very favorably proposals by the Commission to establish a European agency for evaluation of medicinal products, with the power to directly issue EC marketing au- thorizations. We will continue to see competitive advantage in our ability to deal rapidly and flexibly with the evolving European systems. In building the organization needed to develop and commercialize our technology, we have taken a somewhat novel approach. From the outset we have been attempting to build a European-American company or an American- European company. The order is irrelevant. We conduct our operations from two major sites, one near Philadelphia, the other in Leyden, Holland, where we built a major mammalian cell culture development and manufac- turing facility five years ago. We consider both to be part of corporate headquarters and have linked them together through a heavy investment in information systems. We tell our employees that the geographical center of our corporate headquarters is located somewhere in the middle of the Atlantic. Psychologically, there is a very big difference between a headquarters group and a subsidiary group. We are trying to cut through the internecine warfare that consumes so many large companies and instead focus everyone on the external objectives that must be achieved as research, manufacturing, and marketing activities are carried out at both of these locations.

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STRATEGIES FOR U.S. -EC COOPERATION AND COMPETITION 147 For Centocor, 1992 arrived in 1989, when we launched our first pharma- ceuticals product in Europe. For Centocor, Europe is already a single mar- ket. We recognize that many of the liberalizations scheduled for 1992 have not as yet come to fruition and that certain important barriers are unlikely to fall for many years after 1992. Nonetheless, as a young company in the biotechnology industry, we believe it would be foolhardy to wait for the calendar. The possibilities that other companies anticipate in 1992 we see as today's realities. Thus, while some companies continue to plan for 1992, Centocor has already begun implementing actions designed to take advantage of the benefits of a single European market. To a large extent, this is a function of our youth. Well-established pharmaceutical companies are saddled with un- wieldy and inefficient infrastructures. They have networks of companies, personnel, and facilities born in an age of major trade barriers and regulatory constraints. It will be years before they can sort out the social, fiscal, and operational problems associated with the restructurings that will be essential before they can fully avail themselves of the relaxation of trade barriers scheduled for 1992. This fact offers Centocor an enormous competitive advantage, and we are rapidly capitalizing on it. At Centocor we manage Europe as if it were a market to the maximum extent possible. To comply with current legal and fiscal requirements, we have subsidiaries in each of the major countries; however, all operate under the Centocor name. While these Centocor companies give us a local presence and employ the sales representatives who call upon physicians and hospitals, all of their activities are supported from a single location in Leyden, Holland. If a physician or another customer has a question about a Centocor product, he or she calls a local number in their own country, but the call is answered by our multilingual staff in Leyden, who speak in the appropriate language depending upon the color of the phone that is ringing. Likewise, warehousing, shipping, billing, and other services are all handled by a single support group on behalf of the appropriate subsidiary. Although these may seem to be mere details, when added together they become quite important. Furthermore, they are indicative of a management philosophy that seeks to reduce operating costs while optimizing efficiencies and emphasizing customer friendliness wherever possible. To operate in this fashion, we have had to make substantial investments in information systems. We believe that these investments give us the ability to compete very effectively with the large companies without duplicating their enormous infrastructures in each of the European countries. Many issues that impinge upon our ability to function effectively are still to be fully addressed in Europe. We have a very high level of computer literacy within Centocor, with more than 80 percent of our 600 employees

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148 EUROPE 1992 in Europe, Japan, and the United States as registered users of information systems, including electronic mail and sales force automation systems. Yet the degree to which telecommunication standards and regulations on cross- border data transmission will restrict their utilization remains to be seen. Unlike some new companies that are attempting to match the organization structure of the established pharmaceutical companies in Europe, we are seeking every opportunity to operate in a far more efficient manner. Yet there are pricing and reimbursement formulas in some countries that are keyed to work done within their borders and thus may reward those with costly and inefficient structures while punishing those who attempt to eliminate or, in our case, avoid the creation of duplicate infrastructures in their countries. We trust that the correct answers to these and other similar questions will be forthcoming over the years ahead. Last night at dinner I could not help but notice the words over the door in the Great Hall of this Academy: "Hearken to the miseries that beset mankind. And if ever a man fell ill, there was no defense but for lack of medicine they wasted away until I showed them how to fix soothing remedies wherewith they now ward off all their disorders." It is one of the joys of biotechnology and pharmaceuticals research that we labor in this tradition. By providing a nourishing environment, government can greatly facilitate these efforts. This is of critical social importance, for I believe that biotechnology and pharmaceuticals technology in general offer the most cost-effective weapons in the entire health care armamentarium. I myself am convinced that the free enterprise system, democratic capitalism, call it what you will, has a far greater capability of bringing more and different new pharmaceuticals to the market than we would ever see if a few centrally controlled research laboratories were responsible for all new drug development. Government policies that enhance this independent and creative process should be encouraged everywhere but most certainly among the countries of the European Community and the United States of America. MR. HOWARD: I would like to open the floor now to questions. We are limited to two or three questions in the interest of time, and then we will close this symposium. MR. AISENBERG: Michael Aisenberg, Digital Equipment Corporation. I am struck that Michel Carpentier has taken the opportunity to leave, because my question was going to be the most difficult one for him to answer. I was struck that all three of the subsequent speakers were very focused on the ability of public policy to address concerns that U.S. businesses may have with the EC 92 changes. Mr. Carpentier seemed to gloss over the importance of trade-based concerns and focus on the limited area of research cooperation. There is an ongoing effort within the office of the U.S. Trade Representative right now to develop a bilateral dialogue with the EC on a range of trade issues. I would like the gentlemen on the podium who seemed to touch on

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STRATEGIES FOR U.S.-EC COOPERATION AND COMPETITION 149 some of these to address what they think might happen at the political level as we look at EC 92 and whether Mr. Carpentier was indeed sidestepping the question of some fundamental concerns on areas such as tariffs, rules of origin, standards, and intellectual property rights. MR. HOWARD: Can I make one comment, before I answer that is that Mr. Carpentier had to apologize. He did have a previous appointment, and we are running a bit late. That was not an attempt to sidestep any of the . Issues. Can I ask if our panelists have comments? DR. VAN DOESBURG: I do not think I have a lot to add in terms of the political aspects around research at the European scale. I think in my presentation I focused mainly on the need for R&D organizations to be properly deployed across borders, where that makes sense from a business perspective. I do not think I am in a situation to comment on what then the requirements are for policymakers to prearrange things so that all that can happen. I guess the key thing that I would want to leave on the table is that rather than intensifying the debate over a lot of technicalities about policies and the political issues around them, my sense is that the whole policy debate could probably be a lot more productive if it focused on the real needs of businesses rather than on trying to get political equality on all scores. My sense is that not all issues that are being debated are equally important for companies to really establish a European network. I think the last speech is probably one of the better ones to address that point. What are the things that really need to be addressed to make companies like Centocor and others really succeed in a very international way as they are obviously operating? In summary, my plea would be to try to take a hard look at all the issues that are being debated in the political arena and make sure that they do indeed have a direct relevance to the key problems that industries are facing when they are trying to operate in a very international way. MR. HUBBARD: I think it is very important, as we have said many times, that business take the leadership with the governments and that in the United States or Europe we have to be very careful that we do not allow these artificial things to develop, the trade barrier issues. We must keep highlighting this and pointing out the real competitive nature of businesses and whether you are doing harm or gain by these types of things, like local content issues. I think the question was asked earlier today, when you set up an artificial barrier, the real competitor gets inside the barrier very fast anyway, so what have you accomplished? You have to always keep this type of thing in mind and then you kind of come to the right conclusions. DR. WAVLE: I think it is always a question of, is the cup half full or is it half empty? There are those who can look at Europe 1992 and see a threat. I think it should be viewed, as many speakers have said before, as an enormous opportunity. While there will always be individual cases and

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150 EUROPE 1992 particular circumstances where governments will have an interest that they are seeking to protect, I think what we see on the part of the European Community and the member states is a good-faith effort to proceed in a far more open fashion. Those who feel they are being disadvantaged had better spend some time in Brussels and visiting with the particular member states and working with the many trade associations that are represented here. There obviously is not one overall solution, but I think there is a willingness on both sides to accommodate each other and obviously this forum is a good indication that we are well along in that process. MR. SIMON: Greg Simon, House Science Committee. One issue that I did not hear discussed this afternoon was the impact of the eastern bloc changes. There are two or three premises to my question. First, the premise that for some time now the question of whether the EFTA nations should be allowed to join the EC has been complicated by the fact that a lot of civilian research in the EC had connections with NATO, because of the increasing connection between military research and civilian research. So that there was a complication there, and the COCOM restrictions fed into that. Now that NATO really has no one to play against and will take a lesser role in the European sphere, the question arises about the relationship of the east- ern bloc countries to the European Community which may now be a mis- nomer; it is now the European semi-Community if we open up Czechoslovakia, Poland, Hungary, Bulgaria, and Rumania to western or at least neutral sta- tus. What is a U.S. business, what is a European-based business, to make of the fact that as the trade barriers fall in the European Community nations, similar barriers of the past that were in the European Community may now be rising in the eastern bloc countries? Given the inequality that already exists among European Community nations economically, and the need to bring regions up to some level of equality, and the difficulty in doing that and bringing up the eastern bloc countries at the same time, should there be a new alliance of the eastern bloc and the EFTA countries, possibly cen- tered in Vienna? How would that group relate to the concerns you raised today about how U.S. companies should address trade in Europe, since it seems that trade in Europe now also implies that a lot of capital will be fleeing to Prague and Warsaw that earlier was intended for Amsterdam or Brussels? MR. HOWARD: I think you may have defined the subject of our next symposium! Any comments on the eastern European developments? DR. WAVLE: My comment would be that when we look at eastern Europe this is a situation where government has a major role to play. While I personally am delighted, and I think we all are, with the political changes, we also have to recognize that the economies there are in such desperate shape that chaos could result unless there is concerted international action. That is my view. Until they have a basic economy, I do not think that many

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STRATEGIES FOR U.S. -EC COOPERATION AND COMPETITION business opportunities will blossom. Unless we see concerted action by European Community, the United States and nroh~hiv Tenon n~ Well 51 the ' ~~~~ -~~~~~^~ Or^- ~~ ,, to assist in a far more major way than anyone is talking about, I really am concerned about the course of events in the next few years. DR. VAN DOESBURG: You are talking about free trade or trade barriers. I think if you look at it a bit more in the context of today's symposium, which really deals with research and development, my opinion is that all of the eastern European countries are in desperate need of economic repair. That is nothing more than getting basic productivity up to a level where they can compete. If you take some very simple numbers and you look at, say, East Germany, which has the best economy in eastern Europe, productivity is exactly half of what it is in West Germany. So if you want to bring that up to a competitive level, you could basically do away with half the work force overnight, provided you could then make products that can stand the test of quality. To get the rest of the work force productively employed, you would have to sustain an economic growth rate that is well into the double-digit numbers. As far as I remember, there have been very few countries that have sustained double-digit growth rates for any length of time. That puts the challenge of getting the economies in any kind of shape into somewhat of a perspective. It is a humongous task, not only to repair the economies but to get the environmental situations up to snuff. If you look at the enormous problems in virtually all these countries, there are environmental conditions that did not even exist anywhere else in the world many years ago. It really is a very bad situation. ^_r__^ '~~^~ I Before those nations can play any role in terms of a research and development opportunity or base or source, I think you are probably talking well into the next century. Trade flows to a limited extent will really be from those countries into western Europe. You can probably only do that with groups that can stanr1 the test of n.l~litv ~ do not think there is any western European consumer prepared to pay for goods that are inferior in quality. First you have to get beyond the whole problem of barter trade and things of that sort; those things need to be ironed out first. Get the economies in decent shape, and solve the environ- mental problems; that is the sequence of support to eastern European econo- mies. . . . . . .. . . I do not think that at this stage of the game it is fair to even worry about what all the developments in eastern Europe will mean for the R&D community. Not even in situations where and you are right, those things are going on European companies are at the moment not investing, say, in Spain or Portugal but are starting to invest in East Germany. A lot of that is strictly manufacturing investment, because they are trying to get access to the low labor costs and see that in a way as economic support for East Germany. I do not think that is necessarily a leadership type of investment in new

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152 EUROPE 1992 technological developments. It is strictly accessing a temporarily cheaper source. MR. HOWARD: With the recognition that there are more questions and an apology because of a lack of time, I would like to close this symposium and briefly draw together a couple of the threads that we have heard in the last several days. We have listened to the background and mechanics of the formation of the EC and the formation of its R&D policy and strategy. I have particularly appreciated the candor and openness of the discussion. It made it a fascinating symposium. In listening to the responses on each side, it is clear that both the United States and the EC desire closer cooperation. In order for that to happen, we have to look at the basis on which we do business and redo a lot of the bilateral agreements and a lot of the multilateral agreements that govern our relationships. We have to move forward to ensure that these relationships remain intact and that we revitalize them. We certainly face many challenges in this area. The definitions of research and development are undergoing all sorts of changes as we uncover what really is precompetitive and what really is generic technology. As we begin the search for solutions, hopefully the opportunities for cooperation and the possibility for effective competition will be strengthened on a worldwide basis for both communities. U.S. and European industry must lead the way in this process, because I believe that we both have a better attitude toward cooperating than some of the other competitors we sometimes meet in the world. To do so, our system must be bolstered by improved education systems in the sciences, increased flexibility in regulations, and fair terms for cooperation and com- petition. We must realize the fact that in many cases, as one of our speak- ers stated in this last session, nothing beats starting to work, seeing where the problems arise, and then working to solve those problems. I want to thank everybody involved in this symposium for their interest and their participation and you, the remaining audience, for your patience. In particular, I wish to recognize the National Research Council's Office of International Affairs, especially Patrice Zechman and Mitch Wallerstein, for their close collaboration with the Academy Industry Program in establishing the program that is behind this symposium. I would also like to thank the Academy Industry Program staff, particularly Deborah Faison, who pro- vided most of the logistic support for this program.