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Blog: Can Digital Europe Compete?


Olli Martikainen, a Finn, started developing a router — hardware that directs streams of data from one computer to another — back in 1982 at VTT, a research institute in Espoo. The Finnish companies financing the research — including Nokia — didn’t see the potential, so the project was dropped in 1986, shortly before an American start-up called Cisco commercialized similar technology.

Cisco went on to dominate basic corporate networking gear, with annual sales of billions of dollars. Martikainen continued working as a professor and researcher while his prototype gathered dust in a university display.

There have been many other disappointments: Germany’s Fraunhofer research institute invented MP3 technology and Britain’s Sir Tim Berners Lee invented the World Wide Web but it was Americans who capitalized on these breakthrough inventions. With the exception of Swedish music streaming service Spotify, which went public last April with a valuation of $26.5 billion, Europe missed the consumer Internet.

European companies pioneered mobile phone operating systems but Apple and Google are now the global leaders. And Finland’s Nokia and Sweden’s Ericsson, global players in wireless networking technology, are trailing behind China’s Huawei on contracts for 5G next generation networking equipment. (See the story on 5G on page 14.)

An Economic Boost

The question now is whether Europe can leverage the new wave of digital or digitally enabled technologies — such as artificial intelligence (AI), machine learning and blockchain — to create new jobs and new types of products and services, says the World Economic Forum’s 2019 Innovate Europe: Competing For Global Innovation Leadership report, part of the Digital Europe Project, a collaborative effort between the Forum and McKinsey.

Getting it right could have enormous benefits for the European economy. For example, it’s estimated that developing and diffusing AI could add up to €2.7 trillion to European economic output by 2030, the report says. (For more on Europe’s ability to compete on AI see the story on page 18.)

Beyond AI, Europe has identified a few key enabling technologies it wants to lead in: photonics, nanotechnology, electronics, additive manufacturing, robotics, sensors, materials and energy. (For more on manufacturing see the story on page 36.)

Retaining Talent

Europe has the talent. The question is whether it can keep it here. Among those that got away: Frenchmen Yann Lacun, Facebook’s Chief AI Scientist, is leading the social networking giant’s efforts from the U.S. Sebastian Thurn, a native of Germany, moved to the U.S. and ended up heading Google’s autonomous car project, becoming the chief executive of Kitty Hawk, the hover bike startup backed by Google co-founder Larry Page, and founding Udacity, a global MOOC, short for massive open online course. Germany’s Carsten Breiffeld, who worked at BMW for 20 years heading the car maker’s i8 vehicle program and holding top management positions in the departments of chassis development, powertrain development and corporate strategy, departed to co-found Byton, a Chinese electric car company. (He has since left Byton and at press time was rumored to have accepted a position with another Chinese carmaker.)

Lack of Capital

Funding of innovation is an issue throughout the value chain. Startups can’t raise enough growth funding in Europe. Europe is attracting only a fraction of global venture capital into future technologies such as artificial intelligence and it is lagging in both public and private investment in R&D, according to the Forum report.

Market Fragmentation

Although United Tech of Europe is a major theme at this year’s Viva Technology conference in Paris, the long sought-after goal of creating a single digital market has yet to be achieved. The same risks to be true with newer technologies. Individual countries such as France and Germany are forging ahead and funding their own national AI strategies, as are regions such as Flanders in Belgium. Without a united effort, industry observers say it will be difficult for Europe to compete against the U.S. and China in the global AI race.

Reasons For Optimism

Despite these and many other challenges some argue that there are reasons for optimism.

To be sure, Europe cannot compete on a global level by just mimicking its competitors’ ingredients for success, says the Forum report. Many digital technologies and business models exhibit zero-marginal cost and winner-take-most characteristics and Europe has not grown any of the large platform companies that in recent years have come to dominate the technology world and capture large revenue shares. So, the Forum report argues, Europe needs to develop its own, more ambitious innovation model.

“For Europe to have a chance for success in becoming a world leader in digital innovation in this coming wave of the Fourth Industrial Revolution, it will need to catalyze its own strengths. These include a highly skilled population, including in science, technology, engineering and mathematics; a history of collaboration and standard setting; an industrial base that is leading in many manufacturing and service sectors and has many market leaders in SMEs; and a public sector that provides many critical services to citizens,” capturing rich pools of data in the process, the report says.

The Forum has convened a group called Digital Leaders of Europe, comprised of more than 80 entrepreneurs, investors, corporate executives and political leaders, to come up with an action plan, which is currently being put into place.

The plan identifies four catalysts which it says could help Europe become a global innovation leader: promoting public-sector leadership in procurement and standardization; leveraging industrial assets; tapping talent pools both abroad and at home; and leading on governance for data access and trust, which could give it a competitive edge at a time when trust in U.S. and Chinese players is wavering.

The Public Sector’s Role

One idea discussed in the Forum report is doubling the share of digital innovation requirements in tenders for Europe’s €2 trillion annual public procurement spend. It also recommends that Europe consider establishing common digital government standards for public services, encouraging more innovation in government technology.

Reigniting Europe’s Traditional Industries

But to really achieve scale Europe needs to leverage its industrial assets, says the Forum report. Over the past 10 years, many of the traditional industries that make up the backbone of the European economy have either stagnated or declined, undermining Europe’s overall rate of growth, says European venture capital firm Atomico’s December, 2018 report, The State of European Tech. (See the chart.)

At a macro-level, Europe’s technology sector is booming as the wider economy is stuck in the doldrums, notes the report. As of Q3 2018, European growth was flat-lining at 0.2%, the lowest in four years, while Europe’s software industry is growing at least five times faster than the rest of the European economy. And the report predicts tech’s importance to the overall economy will only increase.

Yet the European economy today remains heavily dependent on traditional industries, such as industrial manufacturing, construction, retail and transportation.

“As technology becomes an increasingly more transformative force across all parts of the economy, there is a huge opportunity to digitize and reignite Europe’s traditional industries with trillions of dollars of value in play,” says the Atomico report.

It notes that the combined market capitalization of European constituents of the S&P Global 1,200 equates to $8.8 trillion in just the top 10 most valuable traditional industries.

The median age of the incumbent companies in these industries is well over 100 years. “In the battle of incumbent versus startup, it is not the young who beats the old or the large who beats the small,” says the Atomico report. “It is those who are fast that are more likely to succeed against the slow.”

The only way for Europe to become an innovation leader is to create stronger ties between Europe’s new technology players and traditional industries, say industry observers.

A Need For New Business Models

Europe’s corporates will need to up their game in other ways. Creating joint venture “speedboats” with successful entrepreneurs to grab new market opportunities can be an effective way to test new business models, says German serial entrepreneur Felix Staeritz, a board member of the Forum’s Digital Leaders of Europe working group and a Founding Partner of FACTOR10, an independent corporate company builder that helps corporates do just that.

While European businesses are embracing digital technologies into the core parts of their businesses most are not yet embracing the type of new business models that have a major impact on revenues, says says Simon Torrance, Managing Director UK, FACTOR10 and chairman of the Platform Economy Summit conference.

“European companies are not as bold as some of their American and Chinese counterparts who have integrated platform business models into their mix more effectively,” says Torrance.

Both Staeritz and Torrance are members of the World Economic Forum’s Digital Platforms & Ecosystems group, part of the Forum’s Digital Economy and Society initiative. Over 50 large corporations — including some of Europe’s largest companies — are participating in the group to determine how they might adopt platform business models: the creation of digital communities and marketplaces that allow different groups to interact and transact.

Seven of the 10 most valuable companies globally are now based on platform business models. Companies like Apple, Google, Amazon and Alibaba have used the model to grow exponentially and grab significant market share from established players. Platforms could account for more than $60 trillion by 2025, or more than 30% of global corporate revenue, and yet only 3% of established companies have adopted an effective platform strategy.

“European boards and leadership teams don’t have a real understanding of the types of business models that are effective in the digital world,” says Torrance. He and Staeritz are co-authoring a book and creating a community called “Fightback” to help Europe’s corporates get up to speed.

“I am frustrated by how slow European corporates are adopting and executing new business models and ventures,” he says. “In order to accelerate their ability to transform rather than being left behind we are building up a community of corporates, entrepreneurs, investors and policy makers who are not satisfied with the pace of Europe’s digital activity.”

There is a need for a radical new way to solve problems from a commercial point of view but also from a societal point of view, says Staeritz. “The same digital platforms that can be used to transform corporates’ business model can be applied to societal challenges in areas like climate change or future jobs training or transportation or health care. But we can’t do it with linear thinking,” he says. “We need more entrepreneurial thinking not only for Europe’s corporates to fight back but also to create better jobs, better health and to take better care of the Earth.”

Enlarging The Talent Pool

If it is going to tackle such tough challenges, the Forum report calls for Europe to do more to attract international talent by improving compensation and emphasizing advantages such as the quality of life. And it says Europe should do more to tap into existing talent pools. Women and minorities are underrepresented at every level of the ecosystem..

Using Data Access and Trust As A Competitive Edge

European companies have amassed fewer customers and less data than non-European global platforms, leading some to argue that the EU will never be able to catch up with the U.S. and China. To level the playing field Europe could open its large vaults of government owned non-personal and anonymized data for research, while creating new governance rules that give citizens more control over their data and more companies access to them, says the Forum report. Europeans strong belief in data privacy is not reflected in the technology being developed in the U.S. and China, so fostering secure platforms that make transparent which data are shared and when and that allow citizens to change access rights for data sets, could be a real market differentiator.
 “It is very important that Europe has an offer — not just a law — but an offer of technical products that embody ethics in them, ethics as a design principle,” says Francoise Soulié, a scheduled speaker at Viva Technology 2019 who has more than 40 years of experience working with neural networks, machine learning, social network and Big Data analysis in both academia and industry. “This is going to be a competitive advantage,” says Soulié. “The European mark will say ‘this can be trusted’ — and they are going to be on the market side by side with American and Chinese products without that label.”

Learning From The Past

As Europe forges ahead, it is vital that it “makes the most of our second mover advantage — both in the companies we build and in our approach to building them,” says the Atomico report. “European tech has escaped most of the backlash that has engulfed big U.S. technology companies. For this to continue, we’ll need to learn from past failures and act ethically from day one.”

Source: Artificial Intelligence on Medium

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