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Management and Strategy News
European High-Tech Industry Becomes Increasingly Marginalized
24-Sep-2012
by A.T. Kearney
The high-tech industry in Europe is experiencing
declining figures in all key segments. European companies account for
less than 10 percent of global sales of the world's top-100 high-tech
companies in the information and communication technologies (ICT)
sector. In contrast, the leading companies come from countries like the
United States with its great innovation power, and Asia with its
low-cost production locations. As a consequence, more and more jobs in
the high-tech industry are shifting toward non-European countries.
Europe is losing ground in the global ICT market, although in
macroeconomic terms the European high-tech industry is by no means
insignificant: core industries such as automotive or mechanical
engineering need an agile and innovative European high-tech industry. A
recent study conducted by A.T. Kearney indicates which success factors
of the European high-tech sector might help it to regain greater global
relevance. These factors particularly include a holistic European
high-tech strategy that relies on long-term attractive and newly
emerging high-tech segments, better coordinating E.U. investments and
exploiting the strengths of European high-tech clusters. Measures taken
on a purely national scale, however, will not be sufficient to
successfully tackle global competitors.
A well-functioning high-tech sector is an essential basis for modern
industry. Nowadays, many industries are based on information and
communication technologies (ICT), and especially European companies use
these technologies to develop unique selling propositions in the global
competitive environment. Yet, a study conducted by A.T. Kearney now
shows that already less than 10 percent of the global ICT sales of the
top-100 ICT companies are generated by European companies. Only 15 of
the top-100 ICT companies are headquartered in Europe. Many European key
industries therefore depend on non-European high-tech suppliers—in terms
of production as well as development and innovation. While the
innovation power of the ICT sector in the U.S. market is still strong
and Asia is the leading hardware production region, almost all European
high-tech segments are in retreat.
Jobs and sales figures in decline
For the study, the ICT industry was defined to include nine segments: IT
services, IT hardware, personal computers and notebooks, software,
telecommunications equipment, handsets, consumer electronics,
semiconductors, and electronic components. The global sales in these
segments amounted to US$ 2.8 trillion in 2011, of which US$ 815 billion
were generated by the largest segment, IT services, followed by consumer
electronics (US$ 378 billion), semiconductors (US$ 317 billion), and
software (US$ 297 billion). The declining relevance of the European ICT
market compared to the Asian and North American markets becomes most
obvious in the reduced European share of global sales. "We assume that
only 24 percent of the global sales have been generated in Europe in
2011, and this figure will continue to drop," says Axel Freyberg,
co-author of the study and partner of A.T. Kearney's communications,
media, and technology practice. Especially as a market for products and
services of key segments like IT services, software, telecommunications
equipment, consumer electronics, and handsets, Europe is losing
importance. "Considering this shift, we find it remarkable that leading
European high-tech companies still generate 45 percent of their sales
within Europe. In some sectors Europe is not operating on a sufficiently
global level," says Freyberg.
More than three million Europeans working in the
ICT Industry
While presently more than three million Europeans work in the ICT
industry, this number is on the decline: Asia has taken over especially
the production-oriented, labor-intensive jobs for electronic devices.
This has been fueled by a shift in the ecosystem of suppliers and buyers
toward Asia, but also by relatively lower average hourly wages in China.
In 2011, this rate was at US$ 2.11, while in Eastern Europe the hourly
rate amounted to US$ 8.04 and in Western Europe as much as US$ 40.25 .
There is a danger that not only production-oriented jobs, but also
research and development and services jobs will increasingly move
towards Asia if Europe is unable to regain a strong position in the ICT
market. The figures reveal that Asian education systems have
successfully focused on developing an elite group of researchers and
engineers. While in Europe only 17 percent of the students are enrolled
in engineering, mathematics, or IT programs, the corresponding share in
China amounts to 31 percent, and in Korea and Taiwan to 35 percent . In
the United States, this share drops to 8 percent—a figure, however, that
is compensated by the high rate of immigration of qualified
professionals.
How the European high-tech industry can regain
global relevance
Despite the setbacks in the European ICT market, there are still many
areas of untapped potential to revitalize the industry. "Segments such
as the consumer electronics industry, which manufactures products for
the mass market in large quantities, will continue to concentrate mainly
on the Asian market. However, high tech has a future in Europe in
segments with a high local service share, as well as in segments with
complex B2B processes," says Jan Stenger, co-author of the study and
leader of A.T. Kearney's high technology business in Central Europe. In
most consumer-oriented segments, it will continue to be more difficult
for a European high-tech start-up to reach sustainable size than, for
example, a U.S. counterpart, due to slow scaling in a heterogeneous
European market.
High tech does have a future in Europe and can grow again, however, if
certain problems are solved and if industry leaders and political
decision makers move in the same direction. To this end, A.T. Kearney
has summarized five success criteria to spark a dialogue between
political leaders (on a national as well as E.U. level), companies and
industry associations:
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Focus on top markets in the B2B sector
The strengths of the European market can be better harnessed in
complex B2B sectors rather than in the B2C sector. Europe can
discover hidden potential, for example, in complex software
solutions, embedded systems, or intelligent networks. Europe can
excel especially where ICT is employed to develop unique selling
propositions for industrial applications (e.g., in the automotive or
mechanical engineering industry).
-
Pan-European excellence and innovation clusters
In order to avoid spreading limited financial resources too thin,
which tends to dilute impact, pan-European clusters that bundle
individual parts of the value chains should be formed. The
performance of individual companies might be nurtured by this sort
of collaboration, enabling them to drive the excellence and
innovation power of the European high-tech industry as a whole.
EADS, with Airbus, represents a good example of such pan-European
collaboration.
-
Better and more long-term financing and
coaching models for high-tech start-ups
European governments and E.U. institutions should provide start-ups
in the high-tech sector with better financial support—for example,
by promoting the venture capital sector in the long term and
improving the attractiveness of start-up investments. The support,
however, must not be limited to a single initial aid, but rather
should also include the financing of growth and globalization so
that these companies can achieve critical mass.
-
Technical education and immigration of
qualified staff
The education system must cater to an increase in qualified
graduates in the so-called MINT disciplines (mathematics,
information technology, natural sciences, technology). Northern
European countries, for example, have already increased the number
of technical universities and offer technical courses even in
elementary schools. To face declining population in Western Europe,
governments should also strategically recruit qualified
professionals from non-European countries.
-
Ensuring supply of important raw materials
The future growth of the high-tech industry also depends on the
availability of raw material. European governments should negotiate
additional trade agreements, especially with China, and ensure other
supply sources such as Mongolia, Greenland, or Australia, to secure
access to rare-earth metals. Moreover, enhanced recycling
opportunities for electronic materials need to be developed to face
the global competition around rare raw materials. Germany is already
taking the lead on both topics.
Bright perspectives for the European ICT market
The ICT sector requires a European high-tech strategy to consistently
address these five success factors. "If Europe manages to provide more
financial resources for research and development in selected,
future-oriented high-tech segments, provides more qualified personnel,
and opts for the right strategic framework, it should be able to
significantly improve its position in the global high-tech market. This
would strengthen the export market and generate new, high-end jobs with
attractive tax revenue," summarizes Stenger. To achieve this, the
national governments, E.U. institutions, European high-tech companies,
investors, and educational systems must act in concert.
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