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From Site Selection magazine, March 2013
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A.T. Kearney: European High-Tech Industry Becomes Increasingly Marginalized

by MARK AREND
T

he high-tech industry in Europe is experiencing declining figures in all key segments, according to a 2012 study from A.T. Kearney. 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.

The study 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.

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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 $815 billion was generated by the largest segment, IT services, followed by consumer electronics ($378 billion), semiconductors ($317 billion) and software ($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.

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 EU level), companies and industry associations:

  1. 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).

  2. 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.

  3. Better and more long-term financing and coaching models for high-tech start-ups
    European governments and EU 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.

  4. 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.

  5. 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.

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, EU institutions, European high-tech companies, investors, and educational systems must act in concert.



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