The European Union wants to get its industrial groove back.

The world’s largest trading bloc is scrambling to take part in the global cleantech race. The problem is European innovation and green manufacturing have been trailing behind for years, despite the EU’s otherwise ambitious climate agenda.

By passing the Inflation Reduction Act last summer, the United States suddenly has the tools to rapidly develop clean energy industries in North America. The law caught the 27-member bloc off guard and revealed one of its major weaknesses: a convoluted, bureaucratic and fractured system without a coherent industrial strategy.

“The EU industry is notoriously slow to take up new technologies and innovations,” said Zach Meyers, a senior research fellow specializing in competition policy at the Center for European Reform, a European think tank.

Let’s break down how we got here and where Europe wants to go.

In general, European governments and industries have seen innovation as incremental, looking at how to improve current processes rather than developing new ones, Meyers said. Businesses have also been more focused on securing funds from banks than from other funders, like bigger investment firms, leading to a focus on short-term profitability over long-term planning.

Contrast that attitude with the U.S., Meyers said, “which is a lot more about creative destruction,” with investors willing to support original ideas, take more risks and wait longer for profits.

Europe’s spending on industrial research and development has been trending down, from around 25% of the global total in 2013-2014 to under 19% in 2019-2020, according to the European Roundtable for Industry, a Brussels-based research and advocacy organization with members representing about 60 of Europe’s largest companies. U.S. spending hovered between 35 and 40% during the same period, according to the same analysis.

When it comes to green technologies, Europe has already lost out once to increasing competition from other regions.

Case in point: China dominates the solar photovoltaic sector and the electric vehicle battery supply chain.

EU companies pioneered solar manufacturing and spent billions on subsidies to scale up the technology in the 1990s. China stepped up quickly in the 2000s with massive state subsidies to build its own solar industry—soon outperforming any competition.

Europe was too slow to respond, Lars Nitter Havro, senior analyst at Oslo-based business intelligence group Rystad Energy, told Cipher. (The U.S. was too, but that’s another story.)

“It was like a rug pull,” he said. “China can act very fast, and they did.”

Today, China hosts 90% of the production capacity for six key parts of the PV and battery storage value chain, according to a recent BloombergNEF report.

The chart below is from a separate but related BloombergNEF report on the same topic.

Source: BloombergNEF • Other parts of Asia includes Southeast and East Asia, excluding China. Data captures investments in factories that manufacture components and systems for lithium-ion batteries and solar PV. Factories producing wind blades and related components are not included. Figures represent capital spent on building the factories only and excludes expenses required to produce clean energy equipment.

The EU’s complicated funding regimes— although generous, like the EU’s €38 billion Innovation Fund—have confused and dissuaded clean energy industries from doing business in Europe for years. By comparison, the tax credits in the U.S. law are simpler and more attractive, Meyers said.

“In Europe, you have to hire a group of people to help you figure out where you can get the funding, because it’s dispersed through so many funds and you don’t know if you meet all criteria and how long it will take,” Meyers said.

The EU is trying to turn all of this around through its Green Deal Industrial Plan, which the European Commission, the EU’s executive arm, unveiled earlier this month.

The plan repackages several existing climate and energy initiatives and promises more legislation to enable faster permitting and easier financing to accelerate cleantech deployment.

The vision is to boost Europe’s competitiveness in the net-zero industry by simplifying red tape, making it easier for companies to access tax breaks, training workers on relevant skills and building new supply chains for raw materials through open trade agreements with resource-rich countries.

If done right, this may be enough “to turn the tide,” Nitter Havro wrote in a recent analysis.

Critics say the EU plan is not focused enough to have a major impact.

While the IRA identified key technologies to scale up, such as renewable hydrogen and batteries, the Commission’s plan is vague and touts technologic neutrality, said Julia Poliscanova, senior director for vehicles and e-mobility at the Brussels-based nonprofit Transport and Environment.

“If we don’t focus on two, three things we want to compete on, we will have already lost,” she said.

Poliscanova said adding fresh money to the pot is also important: “We are not saying we should put the same amount of money as the U.S. We already spend money on renewables, batteries—we just need to fill the gap.”

That’s where things get tricky.

EU leaders gave a general thumbs up to the Commission’s vision during a summit in Brussels last week, agreeing to “simpler, faster and more predictable” subsidy rules for cleantech, but also emphasizing those rules need to be “targeted, temporary and proportionate.”

The language reflects the wider tussle in recent weeks among EU capitals, with smaller members worrying softer state aid rules would give an unfair advantage to wealthier members with more money to throw at energy manufacturers, fragmenting the EU market.

In the coming months, the Commission will propose specific legislation to identify which cleantech sectors to prioritize, clarify funding options and lay out plans to build new trade partnerships around key minerals for cleantech manufacturing. The EU is also planning to launch an auction mechanism to fund renewable hydrogen production in the fall.

“It’s never been clearer that EU countries need to act decisively,” Nitter Havro said, and “if the EU can try to move in unison … then it absolutely has a chance to retain its competitiveness.”

What’s important, Meyers said, is for Europe to think long-term as it reenvisions its industrial future.

“Europe is surprisingly good at responding to crises,” he said, pointing to how the bloc handled the energy security crisis sparked by Russia’s invasion of Ukraine. “But what Europe has trouble focusing on is long-term competitiveness because it’s death by a thousand cuts and not a problem that needs to be addressed tomorrow.”