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1The Future of Europe’s High-Tech Industry

The Future of Europe’s High-Tech Industry A little more than 10 percent of global information and communication technology (ICT) revenues are generated by European companies. Europe needs a coherent strategy that will help its most promising high-tech companies compete on the global stage.


In today’s marketplace, only a few industries are dynamic enough to shrug off the global economic malaise. One is high tech. A major employer in its own right, a vibrant high-tech sector can also act as a growth engine for the broader economy. Major European industries, such as automotive, aerospace, engineering, telecommunications, and energy services, depend on cutting-edge technology and continuous innovation, particularly in markets targeted by Asian rivals with much lower labor costs.

Within the high-tech sector, information and communication technology (ICT) is particularly important.1 ICT is a key enabler for just about every other economic sector (see figure 1 on page 3). Yet A.T. Kearney research suggests that less than one-tenth of global ICT revenues are generated by companies based in Europe. The fact is, the region is punching well below its weight in this vital sector of the economy. As a result, a host of important European industries are becoming increasingly reliant on non-European ICT players.

American and Asian companies dominate most of the business-to-consumer sector, while some European champions are still very competitive in the business-to-business markets.Many economic sectors, such as energy, health, traffic, education, and government, are seeking to use ICT to deploy intelligent networks and solutions, enabling the more efficient use of resources and providing a test bed for new products and services. Increasingly complex software is being embedded into European cars, home-automation solutions, white goods, and other products, helping to differentiate them in the market and keep important parts of the value chain and high-qualification jobs in Europe. But there is a risk that an increasing proportion of this product-embedded software will be developed in Asia.

To shore up its industrial base and rekindle growth after the current recession, Europe needs to produce more ICT companies that can compete on the global stage. In the absence of a vibrant, high-tech sector in Europe, major industries will move key elements of the value chain—not only manufacturing but also development—elsewhere. In fact, a healthy high-tech sector is an essential pillar of a modern economy.

The impressive growth of the U.S. economy over the past four decades was fueled, in part, by productivity gains driven by the early adoption of the latest computing and communications systems. While the United States has maintained a world-leading ICT sector, Europe is losing ground in key markets, such as consumer electronics and handsets, where trends are increasingly driving innovation in the enterprise market and the consumer segment. The rise of Samsung and Apple, and the decline of Nokia, the bankruptcy of BenQ Mobile (formerly Siemens Mobile), and the exit of Ericsson from the Sony-Ericsson joint venture in the mobile phone sector, are examples of the recent decline of Europe’s ICT base.

1 Includes consumer electronics and related components


The Shifting Shape of the Global ICT Market In total, the global ICT industry, as defined by this study, generated about $2.8 trillion in sales in 2011 and is projected to grow by 17 percent between 2011 and 2015. Of the nine distinctive ICT segments identified, IT services is the largest segment with $815 billion in sales, followed by consumer electronics ($378 billion), semiconductors ($317 billion), and software ($297 billion) (see figure 2 on page 4).

Surprisingly, only 15 of the top 100 ICT companies worldwide are headquartered in Europe.2 Moreover, these 15 companies account for only about 10 percent of the sales generated by the top 100 companies, even though the European ICT market accounts for 24 percent of the global ICT market. Many of the individual high-tech segments, such as IT hardware, software, semiconductors, and consumer electronics, are developing rapidly and, in some cases, con- verging. Within each segment, there are distinct sub-segments, often with their own market leaders and challengers. For example, Apple has managed to disrupt the entire handset segment by excelling in the key smartphone sub-segment and has created a new tablet sub-segment in the PC and notebooks segment. In this new tablet sub-segment, Apple has 66 percent market share (2011), with the more aggressive analysts predicting it will still account for at least half the market in 2015. Apple, Samsung, and Microsoft are among the leading ICT companies seeking to have sub-segments converge, such as tablets, TVs, and smartphones, with online services and home systems to create full-blown ecosystems.

Note: For this analysis, “high tech“ is defined as information and communication technology (ICT), not including communication services. It comprises nine specific segments: IT services, IT hardware, personal computers and notebooks, software, telecom equipment, handsets, consumer electronics, semiconductors, and electronic components. For a detailed description of the segments, please see appendix on page 18.

Sources: High-Tech Strategy Germany, Oxford English Dictionary, BitKom; A.T. Kearney analysis

Figure 1 Within the high-tech sector, information and communication technology is a key enablerfor almost every other economic sector

Nano-technology

Bio-technology

Productiontechnology

Automotiveindustry

Numerousothers

Processindustry

Health sectorand medicaltechnology

Utilities andenvironmental

sciences

Engineeringand manu-facturing

Micro-and nano-

electronics

Opticals

Micro-systems

Materials

High techAerospace

Communicationtechnology

Informationtechnology

ICT

2 The top 100 ICT companies are the top 10 companies in each of the nine segments by revenue, plus the IT services companies ranked 11-20.


In general, American and Asian companies dominate most of the business-to-consumer (B2C) ICT segments, while some European champions are still very competitive in the business-to-business (B2B) markets. SAP of Germany is a leading enterprise software company, while Ericsson, Nokia Siemens Networks, and Alcatel-Lucent are among the leading suppliers of communica-tions equipment and services, despite strong competition from China. The remaining key European players in semiconductors (ST Microelectronics), handsets (Nokia), and consumer electronics (Philips) are fighting hard to stay among the leaders (see figure 3 on page 5).

Below the top 10 in each segment are a number of midsized European players that assume leading positions in their sub-segments, or have carved out a niche for themselves, such as Gemalto (digital security), TomTom (navigation), Loewe (televisions), Software AG (enterprise management software), NXP (specialty semiconductors), Siemens Enterprise Communications (unified communications solutions for corporate customers), Gigaset (home communications), and Infineon (specialty semiconductors).

Germany’s Infineon, for example, went through a tough process to identify the specific sub- segments in which it could grow and excel. It is no longer among the top 10 global semiconductor

Notes: OSS is operations support system; CE is consumer electronics; IC is integrated circuit; RCL is resistors, capacitors, and inductors; PCB is printed circuit board. “Other” for telecom equipment includes: access equipment (no customer premise equipment [CPE]), video infrastructure, time division multiplexing (TDM), and voice-over Internet protocol (VoIP) or IP multimedia subsystem (IMS). “Other” for electronic components includes: light-emitting diode (LED), laser diode (LD), radio frequency (RF) passive, and IC substrate. Percentages may not resolve due to rounding.

Sources: International Data Corporation, Credit Suisse, General Services Administration, Deutsche Bank, Bloomberg, J.P. Morgan; A.T. Kearney analysis

Figure 2The size and makeup of the nine major information and communication technology segments

Consulting9%

Wireless30%

Other6%

Optical7%

OSS andbilling

10%

Enterprisecommu-nications

17%

Othermobilephones

75%

Smart-phones

25%

PCB21%

IC−logic50%

Discretes6%

Optoelectronicsand sensors

10%

CEenhancement

20%

Anywhere38%

In-vehicle8%

In-home34%

IC−memory20%

IC−analog14%

RCLpassive

22%

Other15%

Service24%

6%Routingandswitching

Servers40%

Desktops31%

Portables56%

Tablets13%

Systeminfrastructure

software29%

Applications47%

Applicationdevelopment

anddeployment

24%

Storage17%

Printers42%

Development and integration29%

Software support7%

Hardware maintenance and support11%

IT management28%

Process management16%

Segmentation ($ billion, 2011)

IT services IThard-ware

Personalcomputers

andnotebooks

Software Commun-ications

equipmentand services

Handsets Consumerelectronics

Semi-conduc-

tors

Electronic compo-nents

815 196 281 297 183 234 378 317 144

Energycompo-nent

Con-nector30%

11%


companies, focusing instead on specialty semiconductor solutions for growing core European industries, such as mobility and automotive, security, and energy efficiency. It spun off its memory chip business into Qimonda (now bankrupt) and sold off its wireless communications unit to Intel. Infineon’s recent history highlights how midsized high-tech companies often have to transform themselves to maintain their position in their sub-segments and fend off larger players looking for new growth opportunities.

To be closer to their customers, some of Europe’s leading B2B ICT companies have located many of their operations outside Europe. U.K.-based ARM, which is a world leader in chip design, positions many of its employees in semiconductor and consumer electronics hubs outside of Europe, such as Silicon Valley, China, and Taiwan.

In the Internet sector, several European high-tech start-ups, such as Autonomy and Skype, have achieved success by developing highly innovative and world-beating products that have effectively created new markets or disrupted existing ones. Autonomy, for example, has built an advanced augmented reality platform, which is currently used by more than 1 million people and 100 partners. While augmented reality already plays an important role in gaming and mobile advertising, this technology could also form the foundation of future Internet search engines based on pictures and shapes, rather than words.

However, Autonomy, which was spun off from Cambridge University in 1996, was bought by Hewlett Packard (HP) in the United States for more than $10 billion in the summer of 2011, while Microsoft acquired Skype, a pioneer of voice-over-IP telecommunications, for $8 billion.

Source: A.T. Kearney analysis

Figure 3The leading companies in the nine major information and communication technology segments in 2011

IT services IT hardware

HP

Cisco

Canon

IBM

Ricoh

Dell

EMC

Xerox

Oracle and Sun

Lexmark

1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

PC/notebooks

HP

Dell

Apple

Lenovo

Fujitsu

Acer

Samsung

Sony

Asus

Toshiba

1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

Software

TSC

Atos

T-Systems

Infosys

Dell

Capita

Oracle

Logica

SAP

BT GS

11.

12.

13.

14.

15.

16.

17.

18.

19.

20.

IBM

HP

Fujitsu

Accenture

CSC

NTT

Capgemini

Xerox

NEC

Lockheed Martin

1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

Microsoft

Oracle

IBM

SAP

EMC

Symantec

CA

Adobe

HP

Sage

1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

Consumerelectronics

SemiconductorsCommunications equipment and services

Handsets Electroniccomponents

LG Display

Chimei Innolux

AU Optronics

TDK

Corning

Murata Manufacturing

Samsung Electro-Mechanics

Samsung SDI

Alps Electric

Kyocera

1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

Cisco

Ericsson

Huawei

Alcatel-Lucent

NSN

NEC

ZTE

Avaya

Juniper

Fujitsu

1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

Samsung

Apple

Nokia

RIM

HTC

LG

Motorola

Huawei

Sony Ericsson

ZTE

1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

Samsung

Panasonic

Sony

LG

Sharp

Changhong

TCL

Philips

Casio

Pioneer

1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

Intel

Samsung Electronics

Toshiba Semiconductor

Renesas

Texas Instruments

STMicroelectronics

Qualcomm

Hynix

Micron Technology

Broadcom

1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

European companies


In essence, Europe has few large-scale ICT companies with sufficient size to act as consoli-dators in the endgame of each industry segment. Consequently, in most ICT segments, European companies are likely to be bought out by larger rivals from other regions.

Why Europe is Losing GroundWe have identified seven reasons why Europe’s position in the global ICT market is deteriorating:

1. The declining importance of the European market

One of the reasons European companies are losing market share in ICT is the declining importance of their home market, relative to that of Asia and North America. We expect the European market to account for just 23 percent of global ICT sales by 2015, down from 24 percent in 2011. The European market is becoming less important in key sectors, such as IT services, software, communications equipment and services, consumer electronics, and handsets (see figure 4).

Notes: “Europe” refers to the geographical region. RoW is rest of the world. Figures may not resolve due to rounding. 1 Represents projected percentage point di�erence between 2011 and 2015


Figure 4The relative size of Europe’s information and communication technology market

IT services IThard-ware

Personalcomputers

andnotebooks


equipment and services


Semi-conduc-

tors


ØEurope(24%)

30%

70%

25%

75%

20%

80%

33%

67%

24%

76%

22%

78%

23%13% 10%

77%87% 90%

815 196 281 297 183 234 378 317 144

Europe’s share of global revenue($ billion, 2011)

–2%0%

–2%

0%

–1% –3% –1%

–1%–2%

Europe Trend European share1RoW

Global revenue: 2,845

Non-European revenue: 2,158 European revenue: 688


While global high-tech sales are rising at about 4.1 percent per annum, ICT-related high-tech sales in Europe are increasing by just 2.5 percent. Not surprisingly, the European high-tech companies’ share of their slow-growing home market is typically much greater than their share of the global market. This is most extreme in the ICT service provider market, where some European players, such as ATOS and T-Systems, generate three-quarters of their revenues in Europe, the Middle East, and Africa (EMEA), with the majority produced by their home countries of France and Germany. By contrast, major U.S. companies, such as IBM and HP, really play on a global scale. The same is true, though to a lesser degree, of enterprise software companies, with SAP and Software AG respec-tively generating 47 percent and 60 percent of their sales in Europe and fighting against the likes of Oracle globally, while the European software market makes up only 33 percent of the global volume.

Europe’s leaders can set the right frame conditions through policies that direct innovation toward promising high-tech fields.

The shift of revenues to emerging markets is clearest in the telecommunications equipment supplier industry, with the Asian and Pacific (APAC) market growing at 7 percent per annum, compared with only 1.2 percent in EMEA. The shift to APAC is helping Asian players, such as Huawei, ZTE, and Fujitsu, gain global market share. In APAC, these companies held a combined market share of 42 percent in 2011, compared to 28 percent globally. European players, such as Ericsson, Alcatel-Lucent, and Nokia Siemens Networks, combined account for only 28 percent of the APAC market, but 56 percent of the EMEA market.

Overall, leading European high-tech companies generate 45 percent of their sales in Europe, compared with 21 percent for non-European companies (see figure 5 on page 8).

2. The struggle for size

With the European Union (EU) split into 27 different markets and declining as a share of the global market, European high-tech companies lack the secure, single-language, and large home-turf advantage enjoyed by Chinese and U.S. rivals. In most cases in the United States they end up struggling against local companies, which already have an advantage because of their substantial home market. In Asia, European companies often settle for ceding market share to local incumbents with lower costs and a better knowledge of the Asian market. At the same time, they are being attacked in the European market by Asian or U.S. companies which have larger scale. Chinese players are particularly on the attack, acquiring strong local brands and midsized players to speed market entry and growth.

To survive, European high-tech companies need to be competitive globally, using their strengths to become an integral part of a global supply chain, which often means investing in Asia.

3. Europe’s shortage of funding

Asian and North American high-tech companies are generally better financed than their European counterparts. Asian governments—in particular China, but also South Korea and


Japan—tend to fund and support their high-tech industries either directly, through credit financing, for example, or indirectly, using protected environments and government policies, while U.S. companies typically have access to greater private funding, generally in the form of venture capital. This enables more high-tech start-ups to grow and prosper, and facilitates management buyouts. Some U.S. high-tech companies also enjoy a more protected home market, as the U.S. government protects certain segments more than the EU.

Tellingly, Asian governments tend to target subsidies toward the development of commer-cial solutions and applications, whereas in Europe, government funding typically supports basic, more theoretical research. Banks are mostly reluctant to fill the gap, as young companies cannot generally offer the securities required for bank loans. With the financial crisis in Europe, banks are particularly reluctant to lend to risky start-ups or, more importantly, to finance the international expansion of national champions or specialized midsized players, and govern-ments have little spare cash to support entrepreneurs. By contrast, China is rumored to still provide substantial support to large companies, such as Huawei and ZTE, to help them gain market share internationally against their European rivals in the telecommunications equipment space.

Note: IT services analysis based on top 20 players; remaining analyses based on the top 10 players per segment

Sources: Annual reports, Factiva; A.T. Kearney analysis

Figure 5European companies’ sales are more heavily concentrated in the slower-growing European market

IT services IThardware

Personalcomputers

andnotebooks




Semi-conductors


Average share for European companies(45%)

Average share for non-Europeancompanies(21%)

100%

Share of revenue generated in Europe by top 100 companies (2011)

European companies Non-European companies

78%

24%28%

25%

53%

29% 27%

19%

31%

21%

35%

15%

44%

13% 11%


According to a recent study by the European Commission, Europe 2020 Flagship Initiative – Innovation Union, Europe invests $15 billion less in venture capital a year than the United States. In fact, most venture capital funds in Europe are too small to support innovative companies and to fund their international expansion on an ongoing basis. Greater access to funding helps U.S. and Asian high-tech companies grow rapidly, enabling them to move more quickly than European players to occupy new international markets.

4. The innovation deficit

Asian and North American economies tend to focus more on research and development (R&D) than their European counterparts, employing more researchers and accumulating more patents. In terms of high-tech R&D, only northern European countries, such as Finland and Sweden, are reasonably competitive with Asian and North American countries.

The time is ripe for EU institutions, European governments, and high-tech players to shore up Europe’s position in the high-tech industry. But, they should pick their battles carefully.The aforementioned European Commission study found that Europe invests 0.8 percentage points less of gross domestic product in R&D than the United States and 1.5 percentage points less than Japan. Although some global players are building R&D teams in Europe (mainly to be close to the complex European market and to tap into the government funding available), the big growth in R&D personnel is elsewhere, given the high cost of labor in Europe. For example, in the telecommunications equipment industry, Ericsson invested $4.4 billion in R&D in 2010, followed by Alcatel-Lucent ($3.6 billion), and Nokia Siemens Networks ($3 billion); all three companies were ahead of Huawei ($2.5 billion) and ZTE ($1.1 billion).3 However, taking employee mix and salary levels per region into account, Huawei invested approximately the equivalent of 147,000 full-time engineers in R&D and ZTE 63,000, compared with 58,000 for Ericsson.4

The significance of Europe’s R&D deficit is compounded by the growing use of patents as compet-itive weapons. Google, for example, acquired Motorola Mobility in 2011 primarily for its intellectual property. The OTT player plans to use Motorola’s patents to try to protect itself and device manufacturers using its Android operating system from having to pay onerous license fees to other patent holders, such as Microsoft. Other high-tech players are also arming themselves—most prominently, a consortium of Apple, Microsoft, RIM, Sony, Ericsson, and EMC outbid Google for a patent portfolio worth $4.5 billion in the course of the Nortel Networks’ bankruptcy.

After several years of decline, two of Europe’s leading high-tech companies, Siemens and Philips, increased the number of patents they filed in 2010. But the figures also show that Asian companies,

3 Dollar amounts converted from euro using rate $1.33/€4 Wages are calculated on the basis of the engineer cost per year and the number of vendors’ employees per region. Sources are the

vendors’ annual reports and the 2010 Electronic Engineering Times’ Global Salary and Opinion Survey.


such as Samsung, Panasonic, and Sony, have become leading filers of patents in Europe, under-lining the growing strength of Korea and Japan in intellectual property (see figure 6).

To be sure, some European countries are still highly innovative. Finland takes the top spot in the Martin Prosperity Institute global ranking of countries’ technological capacity, which uses three measures: R&D spending, R&D workforce, and patented innovations. Behind Finland, in order of ranking from second to fifth place, are Japan, the United States, Israel, and Sweden. Germany is ninth, behind South Korea’s eighth. France, Italy, Spain, and the United Kingdom did not make the top 10.

Of course, R&D spending isn’t everything. Business model innovation can be as important as technology innovation. Take Apple, for example. Apple’s R&D spending is lower than that of Nokia, but Apple’s iPhone is backed by a huge ecosystem of app developers creating software specifically for Apple’s iOS platform.

In essence, there is room for improvement for European ICT companies to step up both their product and business model innovation—the two main engines of high-tech growth.

5. The lack of engineers

Many Asian countries nurture scientific and engineering talent by investing more in their education systems than their European counterparts, while the United States has become adept at attracting highly skilled people from other parts of the world. Some Asian countries have a demographic advantage in that they have a much greater proportion of young people than European countries, so they can use their education system to mold their workforce to the

Note: Some of the patents included in the numbers shown above relate to sectors outside the scope of this paper, such as pharmaceuticals and chemicals.

Source: European Patent Register

Figure 6Asian companies have become leading filers of patents in Europe

Top 10 companies filing new patents (2010)

High tech EU

High tech U.S. and Asia

Non-high tech

2,135

1,765

1,707

1,691

1,682

1,400

1.400

1,286

1,263

1,123

Siemens

Philips

BASF

Samsung

Qualcomm

Panasonic

Bosch

Sony

LG

Bayer


needs of today’s high-tech industries. According to a United Nations Educational, Scientific and Cultural Organization (UNESCO) study, roughly 17 percent of all students in the EU are enrolled in an engineering or mathematics and computer science education course, compared with 31 percent in China, 35 percent in Taiwan, and 35 percent in Korea.5 This equates to an output of 700,000 engineers and computer scientists per annum in China alone (counting university degrees only), compared to 500,000 in Europe—a substantial gap in the resource pool that European companies can tap into for talent, especially in the context of the language fragmentation in Europe, which limits cross-country mobility. The United States is far behind with only 8 percent of all students striving for an engineering or math and computer science degree. However, the influx of 32,000 highly skilled foreigners each year, with appropriate capabilities in these fields, helps to compensate.

6. High-cost labor

Asia, in particular, has much lower labor costs than Europe, meaning Asian countries account for a disproportionate share of high-tech jobs, particularly in the electronic manufacturing services (EMS) sector, at the expense of both Europe and the United States. According to the Electronic Engineering Times’ Global Salary and Opinion Survey, the average total compen-sation received by engineers in 2010 was $75,900 in Europe, compared with $26,800 in India and $16,900 in China. The Economist Intelligence Unit reports for 2011 an hourly manufacturing cost of $2.11 in China, compared to $40.25 in Western Europe and $8.04 in East-Central Europe.

Today, EMS companies account for more than 1 million jobs in Asia—initially in China and Taiwan, and now increasingly in lower-cost countries, such as Vietnam. Although labor conditions in some EMS operations in Asia have been strongly criticized, leading suppliers of high-tech hardware, including Apple and other iconic brands, have outsourced their production to Asian EMS companies. A few European companies, mostly midsized high-tech firms, maintain their production completely in Europe, lowering their costs through automation and constant optimi-zation, and benefiting from higher flexibility (being closer to the market) and branding aspects (for example, “Made in Germany”).

But the evolution of the European television industry is a good example of how the manufac-turing of consumer electronics is migrating east. For years, European companies, such as Grundig and Philips, had a strong position in the global television market. But Philips, which was among the first to go into serial production of color televisions back in the 1960s, has been struggling to compete with the low prices offered by Asian competitors. In 2011, Philips announced a joint venture with TPV Technology of Hong Kong, building on an existing relation-ship. Philips will only retain a 30 percent stake in the new company. Even if production resources remain in Europe for the time being, it seems likely that they will be gradually shifted to Asia to further reduce costs; Philips said one of the main reasons for the merger is to significantly increase scale and harness the manufacturing process of TPV.

7. Lack of raw materials and shortage of components

In the long term, access to raw materials and electronic components at reasonable prices might be the most important factor for the European high-tech industry to survive and stay competitive.

Of the 17 elements that are considered rare earths, several, metals such as lanthanum, gadolinium, terbium, and neodymium, are vital for many hardware-based high-tech products.

5 Engineering: Issues, Challenges and Opportunities for Development, United Nations Educational, Scientific and Cultural Organization, 2010


More than 90 percent of the worldwide supply is currently mined within China, which has put export restrictions on these materials, thereby securing and strengthening the position of Chinese component suppliers. Although the high-tech industry is seeking other sources for these raw materials—China has only roughly a quarter of the known deposits—and there is considerable research into reducing the need for specific rare earth metals and recovering them in recycling, given the substantial environmental impact and cost of mining, the avail-ability of these materials is still the Achilles’ heel of Europe’s high-tech industry.

It is important to increase the attractiveness of the high-tech sector by promoting technology-led achieve-ments and highlighting role models.At the same time, the cost of certain electronic components has risen substantially as leading players—foremost Apple—have locked suppliers into long-term contracts and have secured most of their output. Smaller companies, not least the Europeans, are struggling to compete with such massive buying power and to obtain sustainable prices. Unlike Samsung, for example, most European hardware manufacturers do not have component manufacturing in-house, or even locally in their ecosystem, making them dependent on the capacity to which they can gain access on the open market in Asia.

How Europe Can Respond to Compete Better in High Tech Today, more than 3 million Europeans still work in the ICT industry, despite the exodus of manufacturing jobs to EMS companies in Asia (see figure 7 on page 13). As Europe is not able to compete on labor costs with the rest of the world, it is important that it maintains a strong presence in knowledge-intensive industries, such as ICT.

Moreover, a strong position in the ICT sector is strategically important. Although European industries can source technology globally, there is an inherent advantage to working closely with suppliers in economic clusters, exchanging ideas and collaborating on innovations. The success of Infineon in the automotive industry, for example, highlights the benefits of a close geographic relationship between ICT companies and their customers. Similarly, in the telecom-munications sector, some European service providers have professed a strong interest in maintaining a healthy European supplier industry, as they don’t want to become too dependent on Chinese vendors.

Finally, the strength of European players in the high-tech sector is also a European and domestic security issue, especially when it comes to infrastructure-related high-tech products. For example, the German government’s National Plan for Protection of German Infrastructure specifies that the government should seek out domestic suppliers and support them. However, this is already becoming increasingly difficult. For secure mobile communications, the German


government is relying on non-European handsets, but has contracted a German IT service provider, T-Systems, to develop a secure, encrypted communication system, called Simko, to run on these devices. For the national communication Internet protocol (IP) backbone, another European government faced tough decisions due to the lack of competitive, non-restricted European players in this sub-segment.

Given that Europe’s national governments cannot reengineer products and check for any hidden trapdoors, they would prefer to source ICT equipment from European companies, especially given the closeness of the Chinese vendors to the Chinese government. As national economies and public services become increasingly dependent on evolving intelligent networks and other critical ICT infrastructure, the threat of cyber-crime and cyber-warfare will rise, and this argument will gain in importance.

Note: Figures may not resolve due to rounding.


Figure 7More than 3 million Europeans work in the information and communication technology industry today

IT services IThardware

Personalcompu-ters and

notebooks

Soft-ware

Commun-ications


Hand-sets

Con-sumerelec-

tronics

Semi-conduc-

tors


43%

57%

30%

70%

27%

73%

22%

78%

24%

76%

16% 18%12%

84% 82%88%

1,628 569 298 342 527 252 347 363 404

Employee breakdown for top 100 high-tech companies (thousand, 2011)

Europeanemployees

Europe share oftotal market value

Non-Europeanemployees

Number of employees globally: 4,730 (approximately 9,461 across all companies)Non-European employees: 3,343(6,422 across all companies)

European employees: 1,387(3,039 across all companies)

Extrapolation

30%

70%


Identifying Europe’s Opportunities in ICTThe time is ripe for EU institutions, European governments, and high-tech players to shore up Europe’s position in the high-tech industry. But, they should pick their battles carefully.

In high-tech segments that depend on very efficient manufacturing for the mass market, such as consumer electronics, and which do not carry a strategic importance for other sectors, most of the economic activity will inevitably continue to take place in low-cost countries in Asia.

Still, there may yet be opportunities for European ICT companies to create a unique proposition in the consumer market, as Apple has done using superior design. Although Apple manufac-tures its products in Asia, it employed about 4,500 highly paid software engineers, marketers, and other staff in Cupertino, California, in 2010—10 times more than in 2001.

Europe should consider focusing its main efforts on the B2B sector, leveraging and supporting its existing industrial base.In other high-tech segments of strategic importance for economic development and national security reasons, Europe could, and should, continue to play a major role on the global stage. However, assuming such a role will depend on concerted and determined action by European governments and high-tech enterprises.

In this document, we introduce a potential action plan, comprising the following five key elements, to serve as a baseline for discussions to substantiate European’s high-tech future. Some of these actions are already included in the EU’s Europe 2020 Strategy; others were proposed at the Münchner Kreis High Tech in Europe–Strategies for Leadership conference co-organized by A.T. Kearney in Munich in November 2011, with executives of the high-tech industry and leading industry researchers.

1. Focus on high-end, business-to-business markets

Europe should build on its relatively strong position in ICT segments requiring one or more of the following:

• Local market knowledge and in-depth interaction with industrial or business customers and channels

• Competence in complex solutions, combining ideas from different areas

• An extremely high quality of products and services

• A high degree of flexibility

In essence, Europe should consider focusing its main efforts on the B2B sector, leveraging and supporting its existing industrial base, rather than on the B2C sector. It can be difficult for European companies to scale quickly enough to compete in the B2C sector with U.S. and Asian companies with large domestic markets. Market segments that fit the bill include complex software and system products and solutions, embedded systems, and cyber physical systems and intelligent networks, including associated infrastructure.


As ICT increasingly diffuses into industrial applications such as automotive, process industries, and utilities, Europe should use its relatively strong position in some of those sectors to develop world-leading, high-tech suppliers focused on meeting the needs of these industries. For example, Europe’s strength in automotive creates opportunities to build a high-tech sector focused on serving this market.

With respect to emerging high-tech segments, Europe should focus on areas that match its strengths and promise prosperous growth, such as emerging B2B markets requiring complex ICT solutions, or markets addressing major societal challenges, such as the aging population, through the development of medical technology and robotics. Such markets include smart grids, eMobility, eHealth, and eEducation. Strength in these emerging segments will ensure Europe’s future growth, as established ICT segments start to mature. Moreover, if Europe can gain an early lead in these segments, its companies will be able to export their solutions globally.

To be sure, Europe should not abandon the B2C sector altogether. European companies, such as Nokia (mobile phones) or Loewe (consumer electronics), might still be able to succeed as global players or in specific niches. However, any coordinated effort should clearly focus on the B2B segment, as this approach would have the biggest impact for the European economy overall.

2. Create pan-EU clusters of excellence and innovation

At a time when the weakness of the European economy, fueled by the euro crisis, has made both public and private funding hard to come by, Europe will have to target its limited resources carefully. In essence, that means directing its efforts toward established—yet growing— and emerging high-tech sectors where it has the opportunity to achieve significant traction (see point 1 above). Instead of spreading resources too thin, Europe should focus on creating pan-EU clusters of excellence, in which different elements of the value chain in certain industry sub-segments come together and foster each other’s efforts through close collaboration.

In practical terms, Europe will benefit from targeting funding toward special university faculties and entrepreneurs—either directly or through means of tax breaks or other benefits (infra-structure, for example) to encourage the creation of clusters of excellence in selected high-tech industries—and this should be done at a pan-EU level, rather than on a national level, to create truly European champions. At the Münchner Kreis conference in Munich in November 2011, executives of leading German companies and think tanks agreed that Europe needs a pan-EU, high-tech strategy, rather than separate national strategies, which spread the money too thinly across different geographies and sectors.

At the same time, Europe’s leaders can set the right frame conditions through policies that direct innovation toward promising high-tech fields. This generates win-win situations for society and Europe’s high-tech companies. The EU institutions could try to copy the five- and 10-year plans used by China to grow selected industrial segments through concerted actions. Political decisions, such as the financing of solar energy or the Energy Turnaround for Sustain-ability (Energiewende) in Germany, despite some shortcomings in execution, have triggered innovation and put European companies at the forefront of the renewable energy industry. The same was true for the European standardization of Global System for Mobile Communi-cations (GSM), which laid the foundation for much of the high-tech industry present in Europe today. Such efforts bear repeating.


In order to sustain these pan-EU clusters of excellence, Europe needs to focus its funding on supporting innovation, consider patents as a tool, and continue to push for patent protection globally. European high-tech companies will also benefit from focusing on process and business model innovations, along with service and product innovations.

It is a positive sign that the EU and several national governments are currently pushing for converting EU growth stimulus investments into more high-tech industry cluster investments.

3. Supply better funding for high-tech start-ups

European governments and EU institutions need to work together to greatly increase the venture capital available to European start-ups. If they do not do so, Europe will fall behind in emerging high-tech segments. Europe’s tasks include finding ways to foster the growth and long-term sustainability of European venture capital firms, and make investments in high-tech start-ups more attractive. Together with industry, some European governments have already founded venture funds, such as Germany’s High Tech Gründerfond, which is investing more than €360 million. Some governments are also planning to co-finance business angel investments and are considering tax breaks for venture capital. However, to keep pace with China, the EU requires either governments or financial institutions to also provide better and more specialized loans for growth to enable European high-tech companies to quickly scale beyond national markets, and, thereby, compete against global players with large, strong home markets.

4. Improve the skilled labor supply through more technology-oriented education and targeted immigration

Historically, skilled labor has been one of Europe’s key advantages in the global high-tech market, but this is quickly eroding. To retain this advantage and build on it, European governments will have to ensure their educational systems—starting at elementary school and continuing through to the university level—produce more graduates in MINT (mathematics, informatics, natural sciences, and technology) subjects. Attracting students to technology earlier, and increasing the efficiency of the educational systems by lowering drop-out ratios, for example, is also essential. In this respect, the Nordic countries are the benchmark. They have deployed new technology universities, introduced technology courses in elementary school, and accelerated technology degree courses.

As the population in Western Europe continues to shrink, governments need to pursue a targeted immigration policy to tackle the shortage of skilled professionals in high tech, encourage longer working lives (including enrollment in post-graduate education programs that update people’s knowledge and skills), and stimulate greater participation by women in the workforce to make full use of the talent pool. It is also important to increase the attractiveness of the high-tech sector through the positive communication of technology-led achievements and the highlighting of role models, created by start-ups, that will motivate more entrepreneurs.

5. Safeguard supplies of vital raw materials

Future growth will depend on access to the raw materials required by high-tech industries. It will be a necessity for European governments to reach trade agreements, especially with China, and to secure other sources, such as Mongolia or Australia, to safeguard the supply of the rare earth metals used in many high-tech goods. To help build competence in this area, other European countries should follow Germany’s and France’s lead in establishing raw materials agencies that can work together with industry to procure resources and to find alternative sources of raw materials.


Authors

Axel Freyberg, partner, Berlin [email protected]

Anne Braess, consultant, Munich [email protected]

Jan Stenger, principal, Frankfurt [email protected]

At the same time, R&D efforts should be directed toward the recycling of electronic goods and re-mining of raw materials, with the vision of a closed cycle of materials and goods (or at least cradle-to-cradle systems). Although this will take time, such efforts will create new innovation and business potential. Moreover, recycling such materials is a must, given the scale of global competition for a secure supply of rare earth metals.

In summary: Europe can compete in high tech, but only by strongly focusing its efforts and resources.

If Europe manages to channel more of its limited financial resources into R&D, increase the supply of qualified personnel, and establish the right strategic framework, it could secure and improve its position in the global high-tech market, boosting exports and generating new jobs. As high tech is such an important catalyst for the competitiveness of other industry sectors, Europe has much to gain and much to lose.

National governments, EU institutions, and European high-tech companies, investors, and educational systems will benefit from working together to develop and implement an effective EU high-tech strategy. The current economic climate, and the EU’s deteriorating position in the high-tech sector, calls for a broader and deeper partnership between Europe’s public and private sectors.

A.T. Kearney is actively seeking input and feedback on the hypotheses set out in this paper, which is intended to trigger discussion and energize the debate.

The authors wish to thank Heike Nabert de Lobo and Olivier Ducloux for their valuable contributions to this paper.


AppendixThe following ICT sub-segments were analyzed for this study:

1. IT services: Consulting, development and integration, software and hardware maintenance and support, IT management, process management

2. IT hardware: Servers, storage, printers

3. Personal computers and notebooks: Desktop computers, portable notebooks, tablets

4. Software: Application development and deployment, applications, system infrastructure software

5. Communications equipment and services: Telecommunication network equipment, operations support systems (OSS), business support systems (BSS), service delivery platforms (SDP), enterprise communication solutions, services

6. Handsets: Smartphones, other mobile phones

7. Consumer electronics: In-home, in-vehicle, anywhere, CE (consumer electronics) enhancement

8. Semiconductors: Integrated circuit (IC) analog, IC memory, IC logic, discretes, optoelec-tronics and sensors

9. Electronic components: Other (light emitting diode [LED], laser diode [LD], radio frequency [RF] passive, and integrated circuit [IC] substrate); resistors, capacitors, and inductors (RCL) passive; flexible and rigid printed circuit board (PCB); connection components; energy components

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