Europe’s need to address technology gap: Winner-takes-most dynamic and key challenges

In the wake of Russia’s invasion of Ukraine in early 2022, Europe has been forced to reevaluate its resilience, self-reliance, and strategic autonomy. While the focus has primarily been in the field of defence, energy supply, food security, and supply chain disruptions, the vital role of technology cannot be ignored.

“Notwithstanding urgent challenges, Europe has been experiencing a slow-motion but
increasingly apparent crisis centred on the region’s technological capabilities and the competitiveness of its firms,” McKinsey observes in a new report.

The report titled Securing Europe’s competitiveness, the authors call out the need to address its technology gap. The report comes at a time when Europe has emerged as a clear alternative for companies looking for a base other than the US. Here is a look at key findings from the report.

World leader in sustainability

The McKinsey report highlights that Europe is further ahead than others in the battle against climate change. On the sustainability front, Europe has 2.4 times lower CO₂ emissions per capita and 1.8 times lower CO₂ emissions per unit of GDP than the United States.

The emissions are declining 30 and 50 per cent faster than in China and the US, respectively. Ranked 30 by the Gini index, Europe also performs better than the US and China in terms of income inequality. All the top ten countries in the Social Mobility Index published by the World Economic Forum are European.

Europe also has many fundamental strengths, including high-quality education systems, openness to trade, and relatively lower national debt. All this data shows that the collective scale has worked in Europe’s favour but the progress may not be rapid or extensive enough to secure net-zero emissions by 2050.

Tech-driven corporate gap

While Europe is a clear leader in sustainability and inclusion, tech-driven companies are growing slower than their counterparts in the US. The report found that Europe has many high-performing companies but these firms “are growing more slowly, creating lower returns, and investing less in R&D.”

This is indicative of Europe’s long-standing weakness on ICT and other forms of disruptive innovation. For decades, Europe’s corporate technology gap has been considered a result of specialisation and competitive advantage and is often supplemented by the region’s leadership in fields such as industry, chemicals, materials, and fashion.

However, the same cannot be true any longer as technology is getting seamlessly integrated into every walk of our lives. Whether it’s AI, quantum computing, and cloud, the transversal technologies are permeating every sector and Europe needs to get competitive in these technologies.

McKinsey notes that corporate value added of €2T to €4T could be at stake by 2040. According to the World Economic Forum, 70 per cent of new value created globally will be digital enabled. In a new winner-takes-most dynamic, Europe’s approach may not be sustainable.

Where does the Netherlands stand?

The immediate challenge for the Netherlands is its CO2 emissions, which is higher than the Europe 30 average but much lower than the figures for the US. Its fossil fuel consumption was 92 per cent of primary energy in 2019, compared to 74 per cent average of the Europe 30.

The Netherlands, according to the McKinsey report, also performs well on inclusion, social mobility, life expectancy, social progress, and life satisfaction. At $57,000, the per capita GDP of the Netherlands was considerably higher than the Europe 30 average in 2019.

While the Netherlands is seen favourably on metrics like sustainability and inclusion, it has some work to do on the corporate front. The large corporations in the Netherlands have been found lagging both the Europe 30 average and their US counterparts on return on invested capital.

Falling behind on transversal technologies

Europe’s lagging position in next-generation technologies is a growing vulnerability, the McKinsey report observes. The report further notes that Europe lags on eight of ten transversal technologies, trailing in terms of innovation, production, and adoption. Here is a look at Europe’s performance across ten transversal technologies:

  • Next-level automation: In next-level automation including robotics hardware, additive manufacturing, and virtualisation processes such as digital twins, Europe is found lagging behind the leading or second-best region by an average factor of 0.8. The industrial lead makes Europe well positioned in this space but patent activity and startup investments needs to find its own ground. The next-level automation is forecasted to generate a growth value of €130B by 2040.
  • Future of connectivity: In terms of future connectivity, McKinsey estimates that next-generation connectivity could generate between €1T and €2T in gross value added by 2040. Europe is found to lag across all the three stages of development by an average factor of 0.6. It is on par with other major regions on 5G but trails in the field of IoT.
  • Distributed infrastructure: Europe is also found to be lagging in the field of distributed infrastructure with an average factor of 0.3 and McKinsey estimates this transversal technology to generate gross value added of €400B to €1.6T by 2040 as the market grows.
  • Next-generation computing: Largely consisting of quantum computing and neuromorphic hardware, this new technology could generate up to €1T in gross value added across industries by 2040. In this area, McKinsey found that Europe is significantly behind the leading or second-best region with an average factor of 0.5 across the three stages.
  • Applied AI: This technology applies AI algorithms to enable computers to make sense of real-world data, including video and images (using computer vision), text (using natural language processing), and audio (using speech technology). With an estimated gross value added by 2040 between €1T to €2T, Europe is found to be lagging with an average factor of 0.4 despite increased public funding.
  • Future of programming: Also referred to as “Software 2.0,” this field related to smart algorithms that require less manual coding and the worldwide market for low-code and no-code solutions is expected to grow from about $13B in 2020 to anywhere between $65B and $80B by 2025. On metrics of innovation, Europe is estimated at 0.3 the size of the sole leader, the United States.
  • Trust architecture: A trust architecture provides a framework that enables data to flow through a service-oriented system in a verifiable way. This includes technologies like blockchain and McKinsey estimates that the technology could generate up to €800 billion in gross value added by 2040. Europe is found lagging behind the US with a factor of 0.5 across innovation, production, and adoption stages.
  • The Bio Revolution: This field refers to accelerating development of computing, automation, AI, and data analysis. For its research, the McKinsey Global Institute focussed on biomolecules, biosystems, biomachines, and biocomputing. With an estimated gross value added of €300B to €500B by 2040, Europe trails here with a factor of 0.6 across the three stages.
  • Next-generation materials: Next-generation materials refers to major innovations in the properties, manufacturing processes, and market applications of metals, polymers, ceramics, composites, and coatings. Europe leads on some metrics in next-generation materials overall with a factor of 1.3 but lags behind the US on some metrics of innovation.
  • The future of cleantech: Cleantech refers to solar, wind, and hydro power, as well as newer technologies that are breaking through, including fusion, next-generation energy storage, and hydrogen. Europe is found to be leading on innovation but lags on production. It is on par with China when it comes to adoption.

Immediate challenges faced by Europe

The McKinsey report also highlights the range of impediments preventing Europe from competing in a disruptive world economy. “They include broad and complex issues such as inflexible labour markets, lagging digital infrastructure, and a suboptimal environment for attracting tech and entrepreneurial talent, among others,” the report shows.

The four challenges that stand out include fragmentation leading to lack of scale, a lack of established technology ecosystems, less developed risk-capital funding, and a regulatory environment that could be more supportive of disruption and innovation.

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2048 1366 Editorial Staff
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