"Policymakers can be the catalyst for speeding up Europe's digital transformation."
Who invented the iPad? Steve Jobs or George W. Bush?
According to Bloomberg columnist Mark Buchanan, the question is perhaps not as easy to answer as you might think. As his critical appraisal of the innovations of US computer giant Apple concludes, “Every one of the most important technologies in Apple’s smart products, including the iPhone and iPad, were developed elsewhere and largely thanks to state funding.”
You don’t need to belittle the accomplishments of Steve Jobs to be able to agree with Buchanan on one thing: From the internet through to satellite communications, some of the essential enabling technologies for digitization would never have come into being without government funding. But the direct subsidization of technological projects is not the only way for the state to seed innovation. The way governments set up a regulatory framework gives them a huge amount of influence on what future technologies will be developed where and how fast they will become established. Look no further than the energy transition for proof of that.
The same goes for the digital transformation: Governments and policymakers can be instrumental in pushing the development of enabling technologies and enhancing the innovation capacity of companies. Owing to the substantially more favorable financial, legal and institutional conditions in the US and also in China, Europe’s firms are at risk of falling behind in the digital race of the regions, in spite of the strength of the continent’s industrial base. For the moment, at least, not one European internet firm has made it into the global top 20!
To these ends, governments should help Europe to pool its strengths and resources, improve the digital maturity of its companies, prevent a form of standardization that undermines manufacturing skills, encourage investment in the digital economy, and create points of access and platforms that can be shared by companies, research institutions and other organizations.
Pooling strengths and resources
Germany and Europe have no lack of associations and platforms to discuss the digital transformation. The Federal Government of Germany, for example, has come up with several industry-wide strategies to promote digitization. A Smart Networking Strategy is currently being drawn up for the Digital Agenda, the focal point of these efforts.
The aim is to integrate cross-industry activities in an overall concept, the cornerstones of which were unveiled at the CeBIT trade show in spring 2014. Further projects and initiatives encompass Die neue Hightech-Strategie [The New High-Tech Strategy], Zukunftsprojekt Industrie 4.0 [Future Project Industry 4.0] or IKT 2020 [ICT 2020].
At the EU level, a whole range of additional strategies and actions can be listed – first and foremost Horizon 2020, but also programs focused on specific areas. The latter include ITEA for software innovations and Artemis for cyber-physical systems.
Systematically bundling these initiatives and focusing them on a series of cross-industry objectives would appear necessary to make them more efficient and effective. Two important steps would be:
- To define a shared vision, common objectives and the most important areas of action in a digital transformation charter for industry
- To coordinate all ongoing and planned initiatives via a single project office
The National IT Summit that the German government is currently developing and refocusing in line with the seven areas of action laid out in its Digital Agenda could play a pioneering role in bundling the country’s digital activities. Current efforts by the Fraunhofer Society, industry and the German government to create an Industrial Data Consortium are an important and proper approach to bundling and coordinating efforts and resources at least at the national level. Further steps must nevertheless follow.
Protecting European interests in the context of standardization
Europe’s strengths lie in the diversity of its players and solutions and its outstanding industrial skills. Standards that make too little provision for these strengths and that make it more difficult to apply production expertise in the form of embedded software, for example, would undermine the competitive strength of European industrial companies and threaten the future prospects of the entire economic area.
The interests of European industry must therefore be spelled out clearly, and regulations that have a bearing on competition must be formulated in such a way that the opportunities arising from the digital transformation can be exploited.
Europe’s political arena should support this process. The National Platform for Electromobility (NPE) in Germany is one example of how umbrella organizations, research institutes, companies and unions could bundle their interests. It would thus be welcomed if the EU Commissar for the Digital Economy and Society were to set up a European alliance for digital transformation.
For example, companies and governments could define a coordinated, joint approach to dealing with the American Industrial Internet Consortium (IIC). European interests will only be protected in the long run if Europe presents a unified response to America’s current dominance.
Why it needs a true, pan-European domestic market for infrastructure services
Aside from general standards, the regulatory framework too must be aligned with the digital age throughout Europe.
- First, a harmonized, balanced and genuinely pan-European single digital market is needed in order to overcome current fragmentation. Such a market could slash costs and realize synergies through improved access to information, lower transaction costs, dematerialized consumption, a smaller environmental footprint and superior business and administrative models.
Huge gains in efficiency could, for example, be realized by consolidating the telecommunications market. By way of comparison, Europe has 55 separate mobile networks, while the US has just five.
- Second, the EU’s future legal framework must guarantee technology neutrality and support the use of the most efficient technologies. One aspect of this is to provide harmonized mobile broadband spectrums in line with European demand.
To place investment on a secure footing, stable rules governing the use of frequencies must be established throughout Europe. It is also important to give due account to the peculiarities of internet companies in market analyses and competition procedures. The aim must be to give a greater weighting to dynamic competitive effects (innovations).
- Third, data protection for the EU has to be harmonized. The current European Data Protection Directive dates back to 1995 and is in need of reform. It must be brought into line with conditions in the digital world, quite apart from the issue of considerable differences in national data protection laws. Any provider who sells cloud computing services throughout Europe, for example, has to know and comply with all these different regulations. Instead, a new EU-wide data protection law is needed that should also apply to global players that operate in the single European market. It is therefore important to ratify the General Data Protection Regulation (GDPR) as quickly as possible.
This legal framework must then also ensure that law enforcement no longer runs aground in the way it does today due to the lack of clearly defined competencies. The protection afforded to sensitive data must be aligned with different risks, albeit without causing innovation to grind to a standstill. Otherwise, the opportunities afforded by big data will be wasted.
- Fourth, laws that are of relevance to the digital transformation must be reviewed. The majority of all current laws and standards were drafted at a time when many digital technology applications were still inconceivable.
That explains why highly automated driving, for example, is incompatible with prevailing laws. The legislator must keep up with technological progress and review all valid laws to determine whether they are suitable for the digital transformation.
- Fifth, antitrust laws have to have a global orientation. The market for IT and electronic communications is global, so network effects play a crucial role. Other regions of the world are much more given to ex-post regulation than Europe is. In those regions, global IT and internet firms emerge that are not regulated until such time as they have reached a critical mass.
Yet it is virtually impossible to build this kind of dominant market position from a European base. Although native European companies play in the same global market, they are bound by national antitrust laws. It is thus very difficult to achieve genuine economies of scale if large platforms are prohibited ex ante, instead of being reined in ex post where appropriate.
On this score, the EU is vulnerable to players from other regions – witness the example of US video-on-demand provider Netflix in its competitive battle with Germany’s TV channels. The latter were recently banned from creating their own platforms – the most recent of which was Germany’s Gold, a streaming portal planned by public broadcasters ARD and ZDF – due to antitrust concerns.
- Sixth, setting up a strict procurement law is mandatory. When security-related public contracts are awarded, all providers should be obliged to declare in advance that they are not bound by law or contract to disclose confidential data to third parties (in a “no spy” clause). Just how important this criterion should be to public procurement processes is evident not only from the recent NSA affair, but from as far back as the Patriot Act in 2001.
- Seventh, creating a secure space for data transmission is a must. Telephone and internet traffic within the Schengen area should not leave this area. A secure space for routing could curb the third-party surveillance of communications and strengthen Europe as a location for data.
As things stand, it is almost impossible for telecommunications players in Europe to know what route their e-mails and data packets take as they circumnavigate the globe, nor whether transit countries mirror or store their communications.
- Eighth, the service quality in networks has to be guaranteed. Industry 4.0, cloud services, innovations in the internet of things and in machine-to-machine (M2M) communications are not feasible without fast and secure data networks. Critical applications in plant and machinery need a guarantee of high-quality network connections at all times. Accordingly, it is vital to be able to continue offering a high quality of service.
Net neutrality should be regulated at the European level and defined in such a way that network operators have adequate freedom and incentives, and that innovation is not hindered. The competitive opportunities for connected manufacturing and products in the future are huge. Europe must take advantage of them.
Triggering investment in the digital future
To date, Europe has invested far too little in the digital future. In the USA, venture capital equivalent to about 17.5 billion euros is channeled into this field every year – against a meager 3.5 billion for the whole of Europe. Nor is this figure linked to a shortage of capital: Around the globe, 170 trillion euros of free capital is looking for sound investment opportunities.
To reinforce our digital future, we must therefore create the necessary conditions that make private investment in infrastructure and start-ups worthwhile. Suitable levers could be to stagger the licensing of internet services based on performance and security, or to grant tax breaks on venture capital.
Governments and industry also need to engage in a structured discussion about sharing the burden of investment within the framework of digital transformation. All relevant players should be involved in agreeing how huge pent-up demand for investment should be spread across providers, demanders and governments.
The public sector itself must likewise take action to work off the existing investment backlog in Europe’s economy. Funds from investment programs should be used primarily to promote the digital transformation and exploit the resultant opportunities.
For instance, we believe it is urgent for far more funds from the Juncker plan to be channeled into investments in the digital transformation. This money could be used to achieve progress in many important areas:
- The production of technical infrastructure for the digital economy (Europe-wide expansion of broadband networks)
- The promotion of digital start-ups
- The development of new instruments to mobilize private investment in the digital economy
- Research into and development of a European cloud with high security standards
- Changes to the educational offerings available to schoolchildren and students and for employee development, with the aim of acquiring, improving and updating core capabilities for the digital future
- The promotion of flagship projects within the framework of the putative European economic alliance
- The promotion of big data applications by the scientific and corporate communities
Big data, cloud computing and e-commerce: These and other digital technologies are influencing the whole of Europe’s economy and society. Access to them must be advanced, damage and abuse must be prevented. It might sound tempting to cultivate a harmonized digital industry in Europe with EU subsidies, as was once done in aircraft construction.
The cost would, however, be astronomical – and many times more complex than the successful example of Airbus. On top of these considerations, too much state intervention could stifle innovative capabilities in this rapidly-changing technological environment.
It follows that the EU should, first and foremost, adjust conditions such that a European digital industry can develop itself, and that businesses are also free to source critical ICT skills with Transatlantic and Asian partners, without this putting them at a disadvantage. In particular, these conditions must include a single European market, a legal framework for partnerships with the USA and Asia, and strict procurement law.
There’s much at stake. The digital transformation presents huge opportunities to European industry. That means that policy has to speed up – as companies have to do, too.
As Daimler CEO Dieter Zetsche put it: “Basically, the political and business communities must give clear visibility to the digital transformation as a key future topic in Germany and Europe. Closer cooperation is urgently needed. Only then can political goals and business planning be reconciled to each other; and only then can a divergence between political statements of intent and the reality on the markets be prevented.” That’s just what the US and Apple did.
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