* VDMA says vectoring discourages investments in fibre

* Berlin has promised 50 Mbps for all households by 2018

* Mittelstand in the countryside struggles with Industrie 4.0

By Georgina Prodhan and Harro Ten Wolde

FRANKFURT, April 21 (Reuters) - Germany's powerful engineering industry fears the country will miss out on becoming a global power in digital manufacturing due to complacency about investing in a high-speed, fibre-based telecoms network.

Taking aim at the government, the industry's VDMA lobby says Germany risks heading into an industrial dead-end with the strategy for data connections in remoter areas, where many of its often small but world-class engineering firms are based.

In a position paper seen by Reuters, the association questions how former state monopoly Deutsche Telekom is being allowed to overhaul its old copper wire network. This, it believes, discourages competition and the rolling out of faster, but more expensive, fibre connections.

Deutsche Telekom is relying heavily on vectoring, a technique which improves transmission speeds on the "last mile" of copper wire linking fibre connections at the street cabinet to homes and businesses.

The VDMA, which represents thousands of firms with combined annual revenue of over $200 billion, regards this as a stop-gap and says fibre connections right to the destination building are the only way to meet the medium-term demands of German industry.

"The risk is that a bridging technology like vectoring, when it is implemented in a monopolistic way, will lead Germany as an industrial location into a cul-de-sac in a few years," it said in the position paper this month.

It is not happy that for technical reasons only Deutsche Telekom can provide the upgraded copper links. "In the worst case, the monopoly supplier would rest on its laurels with vectoring technology and neglect further investments."

The document is for internal circulation but, with Germany lagging many competitors in Europe and Asia in providing fibre connections, the paper's author Johannes Gernandt says the government in Berlin should take note. "They have to think further ahead now," he told Reuters.

REASONABLE TIMEFRAME

Deutsche Telekom, in which the government holds 32 percent, says vectoring allows it to do much more, much faster.

"Many homes and companies would be stuck with slow internet for many more years," a spokesman said. "This way, we can guarantee that households now will have fast internet within a reasonable timeframe."

At stake is Berlin's Industrie 4.0 strategy to promote digital manufacturing. This promises to enable leaps in the speed of developing products, as well as technology that detects faults and fixes machines before they break down or that allows parts to tell assembly lines how they need to be put together.

All this needs real-time or close to real-time data connections, but estimates for the cost of connecting every German building with fibre range from 60-100 billion euros.

Germany has a particular problem. Many of its famed "Mittelstand" manufacturers - firms that are small or medium-sized but globally competitive - are spread out in country towns across the country and therefore costly to connect.

Germany is expected to be one of Europe's last nations - along with Italy and Britain, which are also pursuing vectoring - to reach "fibre maturity".

The FTTH Council Europe, which lobbies for access to high-speed networks, defines this as 20 percent of households having a fibre connection. The German level is now about 2 percent and FTTH expects it to reach 20 percent only after 2022. Japan and South Korea achieved this in 2007.

The government has promised every household a download speed of at least 50 megabits per second (Mbps) by 2018 - ample for an average home but not for smart factories in which every machine part will be connected.

Germany has achieved 75 percent coverage so far, but in the countryside it is just 34 percent. That is where many Mittelstand firms like family-owned Harting operate.

Harting supplies customers worldwide with advanced connectors and network technology, employing 4,000 people in Espelkamp, a town of 25,000 in North Rhine-Westphalia.

Harting has high-speed broadband at its headquarters but it's different story in the surrounding countryside where many of its staff live. Here access is as slow as 10 Mbps.

This means software developers often cannot work remotely from home. "People at different sites need to work together. That's a very important part of digital transformation," said head of public relations Detlef Sieverdingbeck.

Harting is also having trouble attracting top staff when they and their families expect big city-standard connections.

"You need to get talent from the hotspots, from the universities," he said. "You can't have them coming here and then wonder why they are appalled by the lack of broadband and disappointed to find they're living in a backward region."

GIGABIT SOCIETY

The government launched an initiative last month to attract 100 billion euros of public and private investment to turn Germany into a "gigabit society" by 2025 - 20 times the 50 Mbps it is promising by next year.

Berlin is offering extra subsidies to supplement the 8 billion euros it expects the industry to invest annually, about half from Deutsche Telekom. The federal and local governments have already put up around 4 billion since 2015 to subsidise provision of fast broadband in hard-to-reach rural areas.

Take-up, however, has been only about a quarter. "The model isn't working," said Gernandt. Critics say it is too complicated to secure the necessary funding from federal and state agencies.

The transport and infrastructure ministry declined to comment beyond what minister Alexander Dobrindt said last month. "We have determined that with our aid programme we have achieved a very high response from the underserviced regions," he said.

Stuart Mitchell, founder of UK-based boutique fund SW Mitchell Capital, is not worried that the government will push Deutsche Telekom into making costly major investments in fibre. "I'm not so sure of the necessity to go to fibre in the end," he told Reuters.

Mitchell says he has made 35 percent on his Deutsche Telekom investment in the past three to four years.

The principal competition in Germany for fast internet connections comes from cable providers Vodafone, Liberty Global and smaller Tele Columbus. Other companies including United Internet and some energy utilities have their own fibre networks.

Some competitors have tried but so far failed in legal actions to loosen Deutsche Telekom's grip. They say they need a level playing field to make large investments. "The investors are ready but they need a long-term, predictable framework," said Rene Obermann, an ex-Deutsche Telekom chief executive and now a partner at private equity firm Warburg Pincus, the majority owner of German fibre network builder Inexio.

Recently, Berlin has emphasised the role that fifth-generation (5G) mobile networks - unlikely to be deployed in Germany until the middle of next decade - will play in enabling technological trends such as self-driving cars.

The radio frequencies for 5G may be auctioned next year and telecom providers will need a fibre backbone connecting the cell sites to begin building the mobile networks around 2020.

In Britain, incumbent BT is also rolling out vectoring and few new fibre connections are being built by BT or rivals for the last mile. France's Orange began rolling out vectoring in 2013.

Italy is trying to promote competition by developing multi-operator vectoring that would allow equal access for all participants. Critics, including the European Commission, say this risks delaying network upgrades.

Britain ranks 16th in the world with an average broadband download speed of 16.3 Mbps, France 52nd at 10.0 Mbps and Italy 58th at 8.7 Mbps, according to U.S. web traffic delivery leader Akamai. Germany ranks 25th in the world with an average speed of 14.6 Mbps. ($1 = 0.9298 euros) (Writing by Georgina Prodhan; Additional reporting by Simon Jessop; editing by David Stamp)