"In just a few months, the world's digital transformation has advanced several years." These simple words uttered by analyst Brice Prunas from Oddo BHF Asset Management sum up an opinion unanimously shared by his peers. His colleague Jack Neele, head of the Robeco Global Consumer Trends Equities Fund, agrees, "The coronavirus has led to an unparalleled boom in the use of digital services."
While remote working is probably the most obvious facet of this shift, almost all human activities have been swept up in the digital wave, from education to healthcare, to manufacturing, retail, leisure and culture. The numbers are spectacular. In 2020, online sales for example jumped by 59% in Australia, 46.7% in the United Kingdom and 32.4% in the United States, according to a report by the United Nations Conference on Trade and Development (UNCTAD) published on 3 May.
Video conferencing solution Zoom, meanwhile, has seen its number of daily users soar from 10 million in early 2020 to more than 300 million today. Netflix, the world’s leading video streaming service, saw its subscriber base shoot up from 167.1 million at the end of 2019 to 203.7 million at the end of 2020. "As stores, restaurants, cinemas and the rest of the economy reopen, the growth of some services will slow," says Thomas Coudry, head of Tech Equity Research at Bryan, Garnier & Co. "However, things will never go back to the way they were. People have developed habits during the pandemic that they will not break."
For the Old Continent, this accelerated digital transformation brings a frightening realisation: not one European company ranks among the world’s tech elite. "The Americans have GAFAM (Google, Amazon, Facebook, Apple, Microsoft). The Chinese have BATX (Baidu, Alibaba, Tencent, Xiaomi). And Europe? We have the GDPR (General Data Protection Regulation)," French President Emmanuel Macron said ironically last December, criticizing the Old Continent’s propensity to create regulations rather than global leaders.
It would be wrong to think that the problem is limited only to GAFAM and BATX. "Digital technology is a winner-takes-all market," says Cyrille Dalmont, associate researcher at the Thomas More Institute. "When a new service is developed, a new player emerges and monopolises the entire market, like Google, which holds more than 90% of the global search engine market." And that case is no exception. Uber dominates private transportation; Netflix for series; Airbnb for property rentals; TripAdvisor for restaurant reservations, and so on.
"Europe woke up from the pandemic with a hangover, bitterly aware of its cumulative lag"
Thomas Coudry, head of Tech Equity Research, at Bryan, Garnier & Co
"The picture is bleak," says Cyrille Dalmont, author of the report "The Impossible European Digital Sovereignty" published in April 2021. "The world’s top five hardware firms do not include a single European company. The same is true for operating systems, cloud computing, data centres, smartphones, semiconductors, chips and microprocessors. Europe has become a digital colony, dependent on American and Asian giants."
Even though Europe fell far behind in the digital race long ago – dating back at least to the 2000s – the health crisis has pushed the Old Continent back even further. "Europe woke up from the pandemic with a hangover, bitterly aware of its cumulative lag" says Thomas Coudry. "People now seem to be becoming truly aware of the problem."
"The pandemic has exposed how crucial digital technologies and skills are to work, study and engage – and where we need to get better," Ursula von der Leyen, president of the European Commission, stated in March 2021, adding, "We must now make this Europe’s Digital Decade."
With that in mind, Brussels plans to set aside about €150 billion for the digital transition by 2027, i.e. 20% of its post-COVID recovery plan, Next Generation EU. The goal is to develop Europe’s "digital sovereignty". And to get there, Europe has defined a set of specific targets for 2030 and will arm itself with a new regulatory arsenal in the form of the Digital Market Act to fight the excesses of giant American tech firms due to their dominant positions.
Too little, too late? Experts are not in agreement. "These are steps in the right direction," says Brice Prunas, Global Equity Fund manager at Oddo BHF Asset Management. "But I’m afraid it’s not enough." By comparison, the world’s largest chipmaker, Taiwan‑based TSMC, will invest $100 billion alone over the next three years to expand its production capacity, according to a Bloomberg article published in April.
Eric Baissus, CEO of the key French tech firm Kalray, which designs next-generation processors, is more confident. "I’m pretty optimistic. Europe has made tremendous progress in recent years, especially in terms of funding. And people are more aware now. If we believe in ourselves, we have real reasons to stay hopeful."
Although Europe is coming from far behind, it is not starting from scratch. As we highlight in our report, the Old Continent features some digital superstars, such as the Dutch company Adyen (payment services), Sweden’s Spotify (music streaming), German firm Zalando (e-commerce), Poland’s Allegro (e-commerce) and the British delivery company Deliveroo, which could benefit from the European recovery plan to grow.
In a sector that is less visible to consumers, "Europe, and Germany in particular, also has core competencies in the industrial digital economy," says Dimitri Kallianiotis, a technology investment expert at Union Bancaire Privée (UBP). Europe is actually a leader in this field of developing smart factories and automating industrial processes (Industry 4.0), with flagships such as the Swiss ABB, France’s Dassault Systèmes, the Swedish firm Hexagon and Germany’s SAP, Bosch and Nemetschek. However, the digitalisation of factories is expected to pick up with the deployment of 5G infrastructures, a field also dominated by Europe with Finland’s Nokia and Sweden’s Ericsson.
"Europe has missed out on the first digital revolutions"
Eric Baissus, CEO of Kalray
"We must remain cautious about 5G infrastructure," says Kallianiotis of UBP. "It is true that Nokia and Ericsson dominate the global market due to their skills, but also due to a combination of circumstances. If the US had not torpedoed Huawei, these two companies wouldn’t be where they are today."
But Europe is looking further ahead. To get back into the game, it is focusing on disruptive technologies known as "deep tech". For example, it plans to develop a first quantum computer by 2025, to edge out on the forefront of quantum capabilities by 2030. "We are entering a new era of innovation, in which European companies can make their mark," says Jack Neele, head of the Global Consumer Trends Equities fund at Robeco. Eric Baissus agrees. "Europe has missed out on the first digital revolutions," Kalray’s CEO says. "But as far as deep tech is concerned, the battle is not lost and we are well positioned on the starting line."