Microsoft's recent acquisition of Nokia's handset business may have been, as Mi- crosoft CEO Steve Ballmer described it, a "bold step into the future" for the tech giant, but some see it as a harbinger for Europe's innovation future. Europe is losing ground in key high-tech markets, particularly in the information and communication technology (ICT) seg- ment, which is viewed as a key enabler for just about every other sector. And with the sale of Nokia, the continent has lost its last gem in the consumer electronics business, also an area of high-tech innovation.
Authors of a recent A. T. Kearny re- port, "The Future of Europe's High-Tech Industry," expect the European market to account for just 23 percent of global ICT sales by 2015, down from 24 per- cent in 2011, underscoring the region's declining importance in key sectors such as IT services, software, communi- cations equipment, consumer electron- ics, and handsets. The analysts estimate global ICT sales at nearly $3 trillion and growing.
Critical voices are now warning that in absence of a vibrant high-tech sector, major European industries from auto- motive and aerospace to electronics and energy could be forced to move key elements of the value chain-not only manufacturing but also research and development-to other regions. These industries have become highly depen- dent on cutting-edge technology and continuous innovation to remain com- petitive in markets targeted by Asian rivals. Although many of the companies in these sectors can source globally, they see an inherent advantage in working closely with suppliers in economic clus- ters, where they can exchange ideas and collaborate on innovations. The success of Germany'sInfineon in the automotive industry, for example, high- lights the benefits of a close geographic relationship between ICT companies and their customers.
Similarly, in the telecommunications sector, major service providers have ex- pressed a strong interest in maintaining a healthy European supplier industry to avoid becoming overly dependent on Chinese vendors for quality and, above all, security reasons. But that wish is proving increasingly difficult to fulfill. The number of companies developing and building telecoms infrastructure equipment, like wireless base stations and routing gear, has dwindled to just three main suppliers-Alcatel-Lucent, Ericsson, and Nokia-and that number could drop to two if Nokia uses its money from Microsoft to acquire rival Alcatel-Lucent. Rumors are afloat that a deal is imminent.
The Finnish manufacturer, which began in the paper industry before be- coming a giant in the mobile handset and infrastructure business, merged its network business with Siemens in 2007 only to buy out its partner earlier this year. Alcatel-Lucent was created a year earlier through the merger of French telecom supplier Alcatel and Lucent, the infrastructure division carved out of AT&T that included the renowned Bell Labs. The company has struggled to compete with Ericsson of Sweden and, in particular, China'sHuawei and ZTE.
Mobile communications and, in par- ticular, handsets are a prime example of Europe's gradual but steady high-tech decline. One after another, Europe's biggest electronics names-Alcatel, Er- icsson, Philips and Siemens-have re- treated from the device sector, after setting global standards and leading the world in sales. Indeed, the region is a shadow of its former self in the heyday of GSM, the European-driven first- generation digital cellular technology that established itself worldwide.
The decline of Nokia, the last big European handset maker standing, came largely with the rise of two un- known players in the mobile communi- cations landscape-Apple and Google. The former took the handset to the next level with a touchscreen and easy- to-use applications, running on its own operating system. The latter threw its software expertise at developing a mo- bile phone operating system that is the most deployed of any in the market to- day. HIS Screen Digest analyst Daniel Gleeson argues that Nokia's fall arose from emphasizing "incremental inno- vation of existing products rather than pushing disruptive innovation." The company, he adds, was too phone- centric, focusing on developing ever- better hardware; it underestimated the importance of software, which pow- ers today's smartphones.
With the success of Facebook, Google, and many other Internet companies, few will disagree that software is where the action is these days, a source of near endless innovation. "Software is eating the whole world," Netscape cofounder and entrepreneur Marc Andreessen re- marked at a recent conference. And software has certainly eaten the lunch of Europe's once-dominant telephone players. A software-driven Internet in- terface enabled Cisco routers to push aside traditional telephone switching gear made by Alcatel, Ericsson, and Sie- mens and allowed Apple to do the same to Nokia in cellphones. The United States is dominating the Internet battle with a nearly invincible position in software and sheer entrepreneurial Darwinism.
"Why wasn't Google made in Ger- many?" asked Konrad Hilbers, the for- mer CEO of the online music service Napster, at a recent symposium. That an economy with as many technically edu- cated people as Germany's has not pro- duced a single globally important business-to-consumer Internet com- pany points to a huge problem with entrepreneurship in Europe, he said. France is no better. Parisians joke, in fact, that if the father of Sergey Brin had picked France instead of America after leaving Russia, his son would have be- come an ivory-tower computer scientist instead of the cofounder of Google. The sad fact is that many aspiring European entrepreneurs simply leave. There are about 50,000 Germans in Silicon Valley, and an estimated 500 start-ups in the San Francisco Bay area with French founders.
It's not all gloom in the European high-tech sector, though. There are opportunities, assert A. T. Kearny con- sultants, but governments and their high-tech players will need to pick their battles carefully. "In high-tech segments that depend on very efficient manufac- turing for the mass market, such as con- sumer electronics, and that do not carry a strategic importance for other sectors, most of the economic activity will inevi- tably continue to take place in low-cost countries in Asia," their study notes.
In addition to listing the various challenges facing Europe's ICT sector- the declining importance of its domestic market, limited private funding, shrink- ing R&D budgets, shortage of engineers and lack of rare-earth materials neces- sary for high-tech products-the study offers suggestions to secure the region's high-tech future. One of them is to fo- cus on high-end, business-to-business markets that require competence in complex solutions, combine ideas from different areas, and focus on extremely high-quality products and services. Ger- man business software company SAP has established a successful position in this segment. Another is to avoid spread- ing resources too thinly by creating pan- EU clusters of excellence and innovation. Different elements of the value chain in certain industry sub-segments should work together, the study's authors ar- gue, and foster each other's efforts through close collaboration.
Venture capital is also essential, and Europe will need to find ways to ensure the growth and long-term sustainability of venture capital firms through tax breaks and other mechanisms. At the same time, to keep pace with China, the European Union and its national gov- ernments will need to provide better and more specialized loans to help Eu- ropean high-tech companies quickly scale beyond national markets and compete against global players. In June, the European Commission took a step in that direction by agreeing to contrib- ute euro77 million ($106 million) to 200 small- and medium-size ICT enterprises exploring new technologies.
And in addition to producing more graduates in MINT (mathematics, IT, natural sciences and technology) fields, European governments need to secure the supply of rare-earth metals used in many high-tech goods through trade agreements. Future growth in many high-tech segments will depend on ac- cess to these raw materials. Germany and France have already established agencies to work together with industry to procure resources and find alterna- tive sources of raw materials.
All this is a tall order but there's plenty at stake: High-tech is an important cata- lyst for the competitiveness of other in- dustry sectors. In the battle to remain a significant player, Europe has much to gain-and much to lose-if it doesn't act.
Microsoft CEO Steve Ballmer, left, shakes hands with Nokia's Chairman of the Board Risto Siilas- maa during the press conference announcing Microsoft's acquisition of Nokia's mobile phone business and patents, September 3, 2013. (Rex Features via AP Images)
John Blau, Contributing Editor DÜsseldorf, Germanyjohn@johnblau.com