MADRID, SPAIN – FEBRUARY 10: An art installation featuring a net sculpture of layers of fibre, braided and knotted together that is paired with spectacular lighting, it keeps floating on the equestrian statue of King Felipe III (1578-1621) in the Plaza Mayor of Madrid. With its 45 meters long, 35 meters wide and 21 meters high the installation, created by US artist Janet Echelman, pulses with the wind and light, creating a choreography of undulating color, on February 10, 2018 in Madrid, Spain. (Photo by Quim Llenas/Getty Images)
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There are fears that Europe is falling behind in digital transformation, just as the so-called fourth industrial evolution begins to change the business models of traditional industries in noticeable ways.

The predicted efficiency gains from the adoption of new technology are so great that, at first glance, they appear to be typos. PwC, for instance, forecasts the shift to contribute as much as 14 per cent to global GDP gains by 2030 — or “about $15tn in today’s value”.

However, digitalisation has so far been patchy. According to PwC, two-thirds of the 1,155 global manufacturing companies they surveyed “have just started or have not yet embarked on their digital transformation”.

Europe, in particular, is lagging behind: just 5 per cent of manufacturers in Europe, the Middle East and Africa (Emea) are “digital champions,” PwC says, versus 11 per cent in the Americas and 19 per cent in Asia-Pacific.

On the other hand, Europe has strong foundations in fields such as artificial intelligence (AI) and cryptography, says Siraj Khaliq, a partner at Atomico, a technology investment group, which compiles an annual report, The State of European Tech. Over the past two years, he says, industry has been increasingly tapping into these innovations with small acquisitions happening all the time.

“The trajectory is very strong for these areas, especially with government policies of encouraging entrepreneurship with tax breaks and other measures,” Mr Khaliq adds. More than 30 national and regional initiatives for digitalising industry have been launched across the continent over the past few years.

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In some cases, companies’ early investments in digital technologies — especially in countries such as Germany and the Nordics — are now starting to bear fruit in increased productivity gains and revenue growth.

Siemens is a good example. When the 171-year-old industrial group spent $3.5bn in 2007 on buying the software company UGS, the term “Industry 4.0” had yet to be coined and few people grasped what Siemens was up to. The news was overshadowed by the company’s role in a price-fixing scandal and a resulting large fine from the European Commission.

24/5/2018 A world map made with keyboard keys for special reports, Alan Knox.
© Charlie Bibby/Financial Times

More than a decade later, however, the purchase is seen as the conglomerate’s first big step towards merging the worlds of hardware and software for “the Industrialised Internet of Things”.

Siemens has since spent another $10bn to acquire about 20 software companies, fitting them into a division called Digital Factory, formed in 2014. Siemens now has 24,500 employees in software, up from 17,500 in 2016, placing it among the top 10 software companies in the world, says Klaus Helmrich, a Siemens board member.

The latest quarterly figures show how important a pillar the unit has become for the company. Digital Factory’s revenue last quarter grew by a fifth to €3.3bn from a year earlier, accounting for 16 per cent of Siemens’ total revenue, and — because of its 21 per cent operating margins — 30 per cent of industrial profits. Such growth is helping to offset chronic problems elsewhere in the company, such as its gas turbine division, which is shedding thousands of jobs and suffering from overcapacity.

Other manufacturers such as Kuka, Trumpf and Bausch & Ströbel are also moving to use more data to form a better picture of how their products perform and how clients use them.

Digital operations have allowed some manufacturers to overhaul their business models, moving from one-off payments to earning a continuous stream of cash, says Hermann Simon, founder of the consultancy Simon-Kucher & Partners. “Service is becoming more and more critical,” he adds. “We see that manufacturers are providing the services themselves, no longer leaving it to others.”

In nine European so-called digital frontrunner countries studied by McKinsey, companies had digitalised about 25 per cent of their systems, and almost 20 per cent of businesses were using artificial intelligence at scale. McKinsey estimates that in these countries — Belgium, Denmark, Estonia, Finland, Ireland, Luxembourg, Netherlands, Norway and Sweden — the adoption of technology had contributed 0.4 to 0.6 percentage points to gross domestic product growth between 1990 and 2016, worth about €15bn a year.

24/5/2018 A world map made with keyboard keys for special reports, Alan Knox.
© Charlie Bibby/Financial Times

Europe as a whole must move faster, however, to avoid being left behind.

When PwC conducted a survey in 2014, North America was leading digitalisation efforts on consumer-facing products and Germany was leading on industry solutions. Asia-Pacific companies, at the time, were starting from scratch but with the intention to leapfrog both countries. By 2018, they had achieved this, says Evelyn Hörberg, one of the authors of the PwC study.

“We now see that Asia has become the digital champion,” she says. “This becomes even more striking when you look at the aspiration levels. Emea sees themselves in five years’ time where [Asia] already is.”

In some sectors, she says, Asian companies made big investments to offer local solutions. “Whereas Europe adopted Amazon, China built Alibaba,” she says.

24/5/2018 A world map made with keyboard keys for special reports, Alan Knox.
© Charlie Bibby/Financial Times

Asia-Pacific companies have built factories to the newest standards, whereas in Europe experts say companies can be held back by legacy assets, strong labour rules, and a rigid mindset that fears disruption and the notion of robots taking jobs.

Labour rules need not be a hindrance, however. Many German companies have put in place digital changes in consultation with workers’ councils. At Siemens, which invests €500m a year to train workers with new skills, a pact with staff signed last month included the creation of a “future fund” to ensure that technical progress does not leave people behind.

Ms Hörberg says Europe needs to be agile, but it is not too late for the continent to take a leading role. “I personally believe we are before the tipping point,” she says, adding that artificial intelligence will not really kick in until after 2025.

Still, there is little room for complacency, says Markus Beyrer, the director-general of BusinessEurope, an umbrella organisation for national business associations.

“Europe has strong traditional industrial sectors that were not born digital. But by playing to our strengths and enabling these sectors to digitalise we can add great economical, societal and strategic benefits for Europe,” he says.

“The pace of the fourth industrial revolution will wait for no one. As the US and Asia rush ahead, Europe needs to carve out its own identity.”

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