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Europe's Risky Specialization Away from Digital Technologies

Europe's Risky Specialization Away from Digital Technologies
 Gilles Babinet
Former Advisor on Digital Issues
 Olivier Coste

In the first article for Institut Montaigne on the digital gap of Europe, both authors used 8 charts to illustrate how the continent was lagging behind competitors in the tech space. This second chapter examines Europe's dangerous specialization away from digital technologies, and the economic and geopolitical risks this could bring. 

Europe's underperformance relative to the US and China is specific to tech and not found in other economic sectors. Quite the contrary: Europe is an innovative continent where companies invest significant resources in research and development (R&D). These companies are global leaders in sectors that materialized during the Second Industrial Revolution (automotive, aerospace, energy, food processing, chemicals, etc.). 

The following chart illustrates this paradox: Europe invests considerably more in mature industries than in tech (80% vs 20% of its total R&D investments respectively). In contrast, the United States has focused significantly on tech, directing over 50% of its total R&D investments into the sector.

Why this paradox? Because tech is an ongoing industrial revolution, fueled by disruptive innovations such as semiconductors, the internet, smartphones and the cloud. Its technologies are unpredictable, its markets are volatile, and changes in direction are abrupt. Conversely, technologies derived from the Second Industrial Revolution are mature, their markets are more predictable, innovation is incremental and visibility is greater. 



Restructuring is costly in Europe. It disincentivizes risk-taking and punishes failure. Over the past half-century, European manufacturers have consequently preferred to invest in the more mature industries created in the 1880s to 1920s (such as the internal combustion engine, electricity, and chemicals), where innovation has become incremental. 

The following charts illustrate the specialization developed by France and Germany in these Second Industrial Revolution industries, with many companies created prior to 1950. For these businesses, restructuring costs are not an obstacle to innovation.


In contrast, US regulations let companies adapt immediately to volatile tech markets. The United States went along to specialize in the technology sector and today, tech companies make up most of the country’s top 20 innovative companies and attract significant capital, as illustrated in the chart below. 



Despite starting from scratch in 1990, China already has several cutting-edge players in tech and is now aiming to overtake the United States in the sector, which has prompted very strong reactions from American authorities since 2017: Chinese tech players were banned from selling their products on American soil (Huawei, Alibaba, etc.), the US imposed an embargo prohibiting advanced US technologies from being exported to China, Congress approved in July of 2022 a $280 billion package to boost US chipmaking and support the US tech industry, etc. 



Europe’s high concentration in mature industries is risky. First, tech is disrupting every sector of the economy, from transportation with autonomous vehicles to healthcare with artificial intelligence. All traditional industries potentially risk facing "disruptive" competition due to the technological advances made by leading American and Chinese tech players. We have already seen Amazon "disrupt" physical retail stores; likewise, YouTube, Netflix and TikTok are "disrupting" a number of major national broadcast media. The car has been an engine on wheels for 100 years. Tomorrow, it could become a computer on wheels. The most advanced players in autonomous vehicles are found in Silicon Valley and (likely) China - not in Stuttgart, Munich or Sochaux. 

Second, tech is essential for military force and strategic independence. England crushed China in 1842 thanks to its innovative steamships. The combustion engine allowed the United States to land in Normandy in 1944 with cruisers, bombers and tanks. And, just last year, when Russia thought it could capture Kyiv in a matter of days with its plethora of tanks, its forces were greeted with Javelin anti-tank missiles, American satellite intelligence, Starlink communications, drones, HIMARS precision rocket and missile launchers, all of which are products of American Tech. Meanwhile, the Biden administration deprived Russian forces of precision weapons by blocking technology exports to Russia. A dash of American tech versus a tide of Russian tanks, and the war changed direction.

Lastly, there has been a major change in the geopolitical landscape, one where China is also becoming a tech power, directly threatening US dominance. In October 2021, CIA Director William Burns warned the American public that "the main arena for competition and rivalry between China and the US will be advanced technologies".

China will have an increasing number of opportunities to exert pressure on European countries if Europe remains dependent. How can we export Airbuses and BMWs to China if Europeans refuse to use Alibaba's artificial intelligence and Huawei's 5G? 



If a new Cold War takes shape between the US and China, how can trade between Europe and China be maintained? Will the United States not prohibit Europeans from selling cars and planes that use American technological components? Will European companies have to use China's 5G, artificial intelligence and semiconductors to protect jobs? How will the public react if Europeans have to use the same artificial intelligence that the Chinese government employs to track down dissidents and control its population? Or if Chinese social networks like TikTok disseminate information that influences European elections?

Europe has tolerated strategic dependence on the United States since 1945 because America is a democracy. But dependence on Chinese tech, in the hands of a totalitarian and combative dictatorship, would spark many different reactions in public political debate across Europe. 

Finally, playing a secondary role in the current industrial revolution is a major risk for Europe. There are many historical precedents. Nineteenth-century China serves as a prime example. 

In the next few articles, we will consider other reasons why Europe lags so far behind in tech and make recommendations on how the old continent can once again become a world leader in industrial revolutions. 

All data has been sourced from Europe, Tech and War, a book by Oliver Coste.


Copyright image: CARLOS COSTA / AFP.

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