The Digital Europe we need
The available data suggest that Europe is lagging behind North America and Asia in R&D and innovation. But, how is Europe performing in the most promising ICT future growth fields? Some recommendations to build the digital Europe we all need.
In the last decade, European countries have seen how the financial subprime crisis has considerably hit them harder than countries in any other region. If we consider the 2004-2012 period, Europe lags behind both North America and Asia-Pacific in terms of GDP, productivity growth and unemployment, especially in peripheral countries.
The Digital Europe we need
It is possible to talk about a two-speed Europe, where the Nordic countries, the UK, and Germany lead Europe and rank high in main macroeconomic indicators, however, the European market as a whole, particularly the European Union, works at a an average between the best performers and the laggards, which is behind of Asia and America. So, why is Europe lagging? What has Europe missed?
The available data suggests that Europe has been left behind in all innovation or research indicator when compared to North America or Asia. This issue represents a huge risk, especially for the growing ICT sector which is the basis for a future global digital economy and society. We believe that people in developed countries tend to behave digitally alike, within reasonable limits, regardless of where they live. As innovations tend to be increasingly based on software and virtualization (for example, cloud computing or big data), it is easier for companies in other regions to take the lead in the European market, and thus, the European demand be supplied by other regions.
Worldwide development Indexes
The valuation of Europe made by major worldwide ranking agencies, which measure competitiveness, innovation capacity, and human capital, shows that Europe is last to North America and Asia. Europe, due to the underperforming eastern countries, has been kept away from the top ranks.
Development indexes for the three regions
Sources : World Economic Forum, INSEAD and United Nations
R&D Investment & Economic growth
After analysing Europe’s level of performance on these innovation indicators we asked ourselves to what extent investing on innovation and research brings economic growth and social welfare to that region. In the ICT sector, our research concludes that there is a very strong correlation, Pearson coefficient over 90%, between the investment in I+D in the ICT industry and the growth of this industry. Furthermore, different studies performed by the World Bank, BID and GSMA have proven a strong relationship between ICT penetration and GDP growth.
The following figure shows the total investment committed in each region. These numbers add the public, private and foreign investment. The numbers are expressed in PPP millions of constant US dollars.
Europe not only has been left behind in terms of absolute annual R&D investment, but has also grown at a slower speed (CAGR 2.5%). Japan and Korea invest in R&D as much as Germany, UK, Spain, France, Sweden, and Finland together. Additionally, China is already investing more than Japan and Korea together.
Total R&D investment (public, private and foreign)
The same investment situation happens when taking into consideration only the ICT sector. In this sector, the difference of R&D investment and growth of the ICT has been notorious in Europe, being the region with the lowest key point indicators. The following exhibit represents both the R&D investment on ICT sector and the ICT market. We have defined the ICT market as the revenue of companies whose activity is related to either: IT Equipment, Electronic components, Telecommunications, Multimedia, Instrumentation, PC Services or Software Services.
Relationship between ICT sector contribution to GDP, R&D investment and ICT market value
Sources: Deloitte Analysis, OCDE, EITO and EC
There is, as we previously said, a strong relationship between the R&D investment and the growth of the market in the region. For example, the US, the biggest ICT market, increased 9.4 points between 2008 and 2011, also had a 15.2 increase in its investigation investment. Asia experienced the greatest increase, 17 points, in the same period and caught up with Europe in terms of market size. On the other hand, Europe invested the least in the same period, and had the worst increase in market size.
Organisations, such as the World Bank, Inter-American Development Bank or the OECD had already stated that ICT sectors are catalysts for economic growth, social development and a basic engine generator of employment. In essence, the ICT industry leverages GDP growth and Europe is missing the opportunity to grow in this sector as it does not invest as much as other regions in R&D.
Furthermore, this lack of investment has been already noticed by the private sector. Taking a quick view at the stocks and ratios of the main companies involved the ICT sector in each region; we noticed that the current stock markets have already evaluated this performance. Companies in the US are typically the biggest compared to their Asian and European peers, and Asian ones have experienced the biggest growth in the recent years. The following table presents the stock market evolution for the main software companies of each region. However, the analysis can be extended to the HW and electronic sector.
Stock market main indicators for top SW companies per region according to R&D investment
Source: Gartner and TCS
The telecom sector is more uniform across the regions. However, European telecom figures are disturbing. Not only they have the lowest gross profit and capitalization margin but also they are the ones whose figures have decreased the most between 2009 and 2014. This issue is relevant for Europe since the innovation in Europe has been supported by the telco companies, whereas in North America this burden has mainly been backed by software companies. Some companies, like Telefonica, have pointed out that the European regulation has deteriorated the margin of the telco companies, which are the agents more strongly pushing to develop the ICT sector and on the latter dragging down its development.
Stock market main indicators for top SW companies per region according to R&D investment
Source: Gartner and TCS
Continental GAPs in ICT trends
America’s thriving innovation has put North America in their current position, as worldwide leader of technological development. Asia is going through a stunning economic growth in all sectors due to their exponential demographic evolution, enabling them to become leaders in adoption of new technologies. Cloud, Big Data, eCommerce and Smart Cities are among the next to last opportunities for Europe to grasp the train of innovation. The following section describes how Europe is performing in what Deloitte believes will be the essential next generation ICT growth trends.
Cloud computing refers to a disruptive technology in which the IT capabilities are provided as a service, using internet technologies whilst enhancing the speed, agility, flexibility, elasticity and innovation in organizations.
The market in 2012 reflects the current leading position of North America in terms of market volume, with Europe falling behind and Asia in the last position. However, the picture shows a very different situation when comparing adoption, measured as the number of cloud apps as % of the total apps. Asia has the highest current figure in 2012, 28% and at the same time experiences the highest growth. The absence of legacy IT systems has eased the implantation of new cloud services in this region.
With some important exceptions, the main technology providers are in general terms headquartered in the United States. This reflects the success of its innovative culture.
Although the market in Europe is relatively big, the adoption is a step behind the rest due to the lack of adoption, especially low in public institutions. The key issues Europe is facing are the following:
- The United States has positioned itself as the world leader in cloud innovation and driver of the technology.Europe lacks of expertise and know how in this area, which has led to insecurity when implementing the solutions.
- The current regulation is very heterogeneous in the continent. The regulatory institutions must make an effort to harmonize the regulation between countries. The Digital Agenda set by the European Union is a step in the right direction as it considers a strategy for cloud computing.
- The previous factors as well as the lack of data center infrastructure deployed in Europe have led to the current picture in Europe where the adoption is lagging behind in the adoption of the technology.
Adoption measures as % of cloud apps of total apps in 2012 and 2014 (Left) and Market Volume in 2012 (Right)
Big data refers to a new generation of technologies and architectures designed to extract economic and social value of big volumes of heterogeneous data. The data is recorded, identified and analyzed at high speeds.
Nowadays, the market is absolutely dominated by North America both in terms of demand and supply; however, this dominance is especially significant on the supply side. Taking into account the top 70 vendors of this technology, 62 of them are headquartered in North America and sum up to 83% of the total revenues generated by the Big Data business.
One of the characteristics which distinguishes North America from Europe lies on the broadness that the Americans have towards this technology. When questioning organizations about the benefits they seek when implementing this technology, the results indicate that, in general terms, North American organizations are willing to improve their productivity and decision making, whereas in Europe the objective is limited to direct value generation.
As it happened with cloud, the lack of expertise in Europe, which would help improve the figures on both the vendor and demand side of the technology, is dragging down the technology. Furthermore, the heterogeneous regulation across the different countries is also being a critical issue. The variety of personal data protection laws creates a complex environment for European multinationals to take the lead in the development of this technology.
Although a survey amongst companies with Big Data deployments reveals ROIs above 42%, which is high even for high tech investments, organizations with no implementations are still skeptical about the ROI they would obtain. This is especially significant in Europe, where traditionally companies have been more risk averse than in North America.
Vendors among the top 70 worldwide (top). Vendor revenues (middle). Adoption(%) amongst organizations(bottom)
eCommerce and mCommerce
North America holds the first position in eCommerce in terms of adoption and market volume, however, Asia’s exponential development in its infrastructure, both transport and telecommunications, is driving sustained and rapid market growth, which will soon leave Europe in the last position.
|North America||Europe||Asia Pacific|
|# Transac. (MM)||528||1.121||520||1.215||2.051||3.788|
Europe is committing itself to provide the environment for the development of the technology:
- Leader in terms of infrastructure. Both its transport and telecommunications infrastructure is of the highest quality, reaching all the corners of the continent.
- The objectives set by the European Union seek an increase in eCommerce use by both SMPs and private individuals.
- The Single Euro Payments Area (SEPA) and Payment Service Directive (PSD) are designed to harmonize money transfers and payments throughout the 32 European countries, and treat the continent as a unique domestic region.
These actions are steps on the right direction as they have provided the right environment for the technology. Nevertheless, Europe also faces different challenges to avoid being left behind, especially motivating consumer adoption:
- The European market can be divided into three segments with very different levels of development:
- Mature markets: Northern Europe.
- Growing markets: South Europe
- Emergent markets: Eastern Europe.
Nowadays, Northern Europe concentrates the eCommerce transactions. New actions need to ensure that the gap between the three regions is closed.
- Further regulatory measures have to be made to create a heterogeneous region in areas such as surcharges or taxes.
When considerig mCommerce, the analysis suggests the same conclusions, however Europe's problems have createsd a bigger difference with other continents. Asia is the worldwide leader in terms of adoption and market volume, fllowed by North America, who has proven de main innovator with technologies such as Google Wallet, Isis or apple pay.
Kenya, worldwide mCommerce leader, has demonstrated that the typical success factors: stable telecommunications infrastructure, mature finance services and progressive regulation do not guarantee individual use. This is the main default for Europe, which hasn’t been able to close the gap between the early adopters and early majority and enable future growth. Too many standards and ecosystems in Europe due to conflict of interests between parties have led to tests and pilots which do not end up in a solid final product.
Smart grids, which are a small part of the Internet of things, look to optimize the distribution of the electric industry by enabling a machine to machine communication between smart devices located near the consumers’ houses and the electric operators.
Smart grids are being supported and funded mainly in the Asian region, particularly in China, due to its still ongoing process of industrialization. However, North America is expected to be the top region in R&D spending on this technology. According to FutuRed, both regions will spend around €30bn in research between 2010 and 2020. Additionally, Europe is expected to continue its trend, and stay behind in research investment in this technology
A smart city is a concept with its meaning in continuous evolution. It implies the improvement of the citizen’s quality of life through the use of ICT technologies. In order to do so, cities deploy an ultra-high dense network of interconnected sensors.
Smart cities objectives do not only cover the enhancement of the citizen’s life, but also look to improve the sustainability and efficiency of the public services. In this case, Europe leads the Smart Cities ecosystem worldwide. It is the region with the highest number of projects (either completed or ongoing) and percentage of adoption, which rises to 44%.
In this case, the European Union has put focus on developing innovation in a coordinated manner (including and leading the research of all countries) by creating Working Groups. The objective of these Working Groups is developing formalized ICT solutions, increasing visibility while linking the information to a searchable database. The Working Groups discuss and evaluate, at expert level, barriers to technology development and deployment and possible solutions at EU level to address these.
The differences between Europe and the other regions may be explained in the way Smart cities are perceived. According to Gartner, while the US and Asia believe that Smart cities fit only managing public services, Europe also believes that they reduce costs and improve CO2 emissions, amongst other strategic objectives. Nevertheless, the regions of North America and Asia are also developing several projects like Europe and have plans to develop it in the future.
Europe should take advantage from its knowledge in Smart Cities and take leadership on this ecosystem. Since most of the Smart Cities applications will be based on software and virtualized, it is an opportunity for the European companies to supply the American and Asian future demand.
Number of smart cities projects and adoption (% of cities with at least one smart city initiative)
Following Alan Kay’s quote, “the best way to predict the future is to invent it”, Europe will have to invest in technology and innovation, the main driver of sustainable growth to revert the current situation. ICT R&D and innovation is essential in order to maintain Europe’s economic position in the digital economy, a handful of measures and actions, some of them highlighted in this brief summary, must be taken.
In Deloitte we strongly believe that:
a) Growth in eCommerce and mCommerce in Europe requires a further development of the SEPA initiative to guarantee further homogenization when applying surcharges and taxes. Europe can still become a strong player if the right conditions are set for peripheral countries to close the gap with northern Europe. Banks, credit card companies, and telecom operators across Europe must be aligned to provide solid solutions.
b) Establishing a common regulatory cross-industry framework. The new ecosystems involve players from different industries and areas, which require a new holistic approach to regulation.
c) Harmonizing personal data protection laws across the continent is particularly important. The current framework is creating barriers and complexity which drags down development. Universal European laws would ease the adoption of Big Data and Cloud services.
d) Stimulating public-private-partnerships initiatives will lead to implement the new technologies, which is the idea on which the leadership in smart cities has been founded. This will not only attract and generate expertise but also create the basis for further development of private initiatives.
e) Fostering programs and initiatives to finance and increase European ICT enterprises presence abroad, focusing not only on emergent countries, but also on Asia and US, will boost Europe’s capacity of innovation.
Europe faces several challenges which need to be addressed to secure the future of the European ICT sector. Future growth of services such as Smart Cities, Cloud, or mCommerce requires reaching consensus at a European level to set a new common regulatory cross-industry framework. As the ICT sector innovation is increasingly being decentralized due to higher dependency on software and virtualization, investment on technology has shifted to other regions which have better fostered an innovative environment. Europe should toss its risk-averse culture and start innovating before it is far too late.
Información de contacto
Fernando Huerta Aguirre
Socio Responsable del Sector de Telecomunicaciones
+34 914 432 540
Manuel Machado Alonso
Director del Sector de Tecnologías Disruptivas
+34 914 432 243
Santiago Andrés Azcoitia
Gerente del Sector de Telecomunicaciones
+34 914 432 676
Sources:  According to Wikibon  TCS